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Americas Morning Summary
October 20, 2010
The Goldman Sachs Group, Inc.
Focus Items
This document contains comments
related to the following stocks: Americas: Retail: The new retail life cycle - focus on capital allocation 1
Americas: Consumer Staples: Buy MJN, HANS, and LO with M&A picking up;
2
Agilent Technologies (A) upside to TUP on increased cash returns
Altera Corp. (ALTR) UnitedHealth Group (UNH): The next six weeks will drive the 2011-2013 earnings
America Movil (AMX) 3
American Electric Power (AEP) view
Axtel (AXTELCPO.MX) Intuitive Surgical, Inc. (ISRG): Slowing system sales/procedure volumes drive 3Q
Banco Compartamos 4
revenue shortfall
(COMPARTO.MX)
Bank of America Corporation (BAC) Yahoo! Inc. (YHOO): Stuck in land of single-digit revenue growth for a few more
Bed Bath & Beyond, Inc. (BBBY) 5
quarters
Boston Scientific Corp. (BSX)
CBS Corp. (CBS)
CIGNA Corp. (CI) Key Data Changes
The Coca-Cola Company (KO)
Crown Holding, Inc. (CCK) Investment List Additions
The Walt Disney Company (DIS) Company Ticker Investment List Additions
Eli Lilly & Company (LLY) NII Holdings NIHD Americas Buy List
Forest Laboratories, Inc. (FRX)
Grupo Televisa (TV) Rating and price target changes
Harley-Davidson, Inc. (HOG)
Rating/
Illinois Tool Works (ITW) Coverage view
Price Target Estimates
International Game Technology Company Ticker New Old New Old % chg Current Year Next Year Fiscal y/e
(IGT) America Movil AMX N/C unch ↑ $59.30 $57.00 4.0% $3.60 $4.37 Dec
Intuitive Surgical, Inc. (ISRG)
Johnson & Johnson (JNJ) Axtel AXTELCPO.MX S/C unch ↓ P$7.10 P$7.30 (2.7%) (P$0.20) (P$0.01) Dec
Juniper Networks, Inc. (JNPR) Bed Bath & Beyond, Inc. BBBY N/N unch ↑ $50.00 $49.00 2.0% $2.86 $3.24 Feb
Kohl's Corp. (KSS)
LLX Logistica (LLXL3.SA) Boston Scientific Corp. BSX S/N unch ↑ $5.50 $5.25 4.8% $0.38 $0.41 Dec
Lockheed Martin Corp. (LMT) Crown Holding, Inc. CCK B/N unch ↑ $36.00 $33.00 9.1% $2.25 $2.80 Dec
Megacable (MEGACPO.MX)
Grupo Televisa TV N/C unch ↑ $22.50 $22.00 2.3% $1.07 $1.26 Dec
MGM Resorts International (MGM)
Microsoft Corp. (MSFT) Intuitive Surgical, Inc. ISRG S/N unch ↓ $240.00 $270.00 (11.1%) $8.72 $9.89 Dec
Mylan Inc. (MYL) LLX Logistica LLXL3.SA N/A unch ↑ R$9.60 R$9.50 1.1% (R$0.15) (R$0.40) Dec
NET (NETC4.SA)
The News Corp. (A) (NWS__A) Lockheed Martin Corp. LMT S/C unch ↓ $63.00 $65.00 (3.1%) $7.00 $6.25 Dec
The News Corp. (B) (NWS) Megacable MEGACPO.MX S/C unch ↓ P$26.50 P$26.80 (1.1%) P$1.91 P$1.87 Dec
NII Holdings (NIHD)
NII Holdings NIHD ↑ B/C N/C $47.90 unch -- $2.17 $2.78 Dec
Occidental Petroleum Corp. (OXY)
Oi (Telemar) (TNLP4.SA) Oi (Telemar) TNLP4.SA N/C unch ↓ R$28.00 R$28.30 (1.1%) R$4.27 R$4.68 Dec
Parker Hannifin Corp. (PH) Parker Hannifin Corp. PH N/A unch ↑ $92.00 $76.00 21.1% $6.05 $7.10 Jun
Peabody Energy Corp. (BTU)
Scripps Networks Interactive, Inc. Solera Holdings, Inc. SLH N/N unch ↑ $46.00 $43.00 7.0% $1.55 $1.85 Jun
(SNI) Stryker Corp. SYK N/N unch ↑ $54.00 $53.00 1.9% $3.31 $3.66 Dec
Solera Holdings, Inc. (SLH)
For further product information,
contact:
New York Investment Research
(212) 902-1000
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research
Analysts employed by non-US reports. As a result, investors should be aware that the firm may have a conflict of interest that could
affiliates are not registered/qualified affect the objectivity of this report. Investors should consider this report as only a single factor in making
as research analysts with FINRA in their investment decision. For Reg AC certification, see the end of the text. Other important disclosures
the U.S. follow the Reg AC certification, or go to www.gs.com/research/hedge.html. This report is intended for
distribution to GS institutional clients only.
Global Investment Research
Steel Dynamics Inc. (STLD) Telecom Argentina TEO N/C unch ↑ $22.30 $21.50 3.7% $2.48 $2.43 Dec
Stryker Corp. (SYK)
Telecom Argentina (TEO) Telesp TLPP4.SA N/C unch ↑ R$45.60 R$43.30 5.3% R$4.65 R$4.81 Dec
Telesp (TLPP4.SA)
Telmex (TMX) Estimate changes
Texas Instruments Inc. (TXN) Rating/ Current Year Next Year Fiscal
Coverage y/e
TIM Brazil (TCSL4.SA) Company Ticker view New Old % chg New Old % chg
Time Warner Inc. (TWX)
Altera Corp. ALTR N/A ↑ $2.46 $2.40 2.6% $2.10 unch -- Dec
Tupperware Brands Corp. (TUP)
UnitedHealth Group (UNH) America Movil AMX N/C ↑ $3.60 $3.14 14.6% ↑ $4.37 $3.88 12.5% Dec
Viacom Inc. (VIA__B) American Electric Power AEP N/N ↓ $3.05 $3.09 (1.2%) ↑ $3.17 $3.13 1.2% Dec
Vivo (VIVO4.SA)
Waste Connections, Inc. (WCN) Axtel AXTELCPO.MX S/C ↑ (P$0.20) (P$0.21) 3.4% (P$0.01) unch -- Dec
Weatherford International Ltd. Bed Bath & Beyond, Inc. BBBY N/N $2.86 unch -- ↑ $3.24 $3.22 0.5% Feb
(WFT)
Boston Scientific Corp. BSX S/N ↑ $0.38 $0.33 14.0% ↑ $0.41 $0.39 3.9% Dec
Yahoo! Inc. (YHOO)
The Coca-Cola
KO B/A ↓ $3.50 $3.53 (0.6%) ↑ $3.90 $3.88 0.4% Dec
Company
Crown Holding, Inc. CCK B/N ↓ $2.25 $2.28 (1.5%) $2.80 unch -- Dec
Forest Laboratories, Inc. FRX N/N ↑ $3.95 $3.84 2.9% ↓ $4.30 $4.32 (0.5%) Mar
Grupo Televisa TV N/C ↓ $1.07 $1.10 (2.2%) ↓ $1.26 $1.29 (2.1%) Dec
Harley-Davidson, Inc. HOG S/A ↑ $1.29 $1.10 17.1% ↑ $2.22 $2.16 2.5% Dec
Illinois Tool Works ITW N/A ↑ $3.12 $3.10 0.5% ↑ $3.70 $3.60 2.8% Dec
Intuitive Surgical, Inc. ISRG S/N ↓ $8.72 $8.76 (0.4%) ↓ $9.89 $10.02 (1.3%) Dec
Johnson & Johnson JNJ N/N ↑ $4.76 $4.71 1.2% ↓ $4.90 $5.06 (3.1%) Dec
Juniper Networks, Inc. JNPR B/N $1.00 unch -- ↑ $1.36 $1.35 1.0% Dec
LLX Logistica LLXL3.SA N/A ↑ (R$0.15) (R$0.17) 10.2% ↑ (R$0.40) (R$0.43) 7.2% Dec
Lockheed Martin Corp. LMT S/C $7.00 unch -- ↓ $6.25 $6.50 (3.8%) Dec
Megacable MEGACPO.MX S/C ↓ P$1.91 P$1.98 (3.5%) ↓ P$1.87 P$1.97 (5.3%) Dec
NET NETC4.SA N/C ↑ R$0.82 R$0.75 9.0% ↓ R$1.03 R$1.05 (1.1%) Dec
Occidental Petroleum
OXY B/A ↑ $5.93 $5.80 2.3% ↑ $9.40 $9.25 1.6% Dec
Corp.
Oi (Telemar) TNLP4.SA N/C ↑ R$4.27 R$4.19 1.9% ↓ R$4.68 R$4.95 (5.4%) Dec
Parker Hannifin Corp. PH N/A ↑ $6.05 $4.95 22.3% ↑ $7.10 $6.00 18.4% Jun
Peabody Energy Corp. BTU B/A ↑ $3.12 $3.06 1.9% ↓ $4.61 $4.63 (0.4%) Dec
Solera Holdings, Inc. SLH N/N ↑ $1.55 $1.47 5.4% ↑ $1.85 $1.74 6.7% Jun
Steel Dynamics Inc. STLD B/N ↑ $0.65 $0.62 4.6% $2.00 unch -- Dec
Stryker Corp. SYK N/N ↑ $3.31 $3.29 0.7% ↑ $3.66 $3.62 1.3% Dec
Telecom Argentina TEO N/C ↑ $2.48 $2.47 0.2% ↓ $2.43 $2.46 (1.3%) Dec
Telesp TLPP4.SA N/C ↓ R$4.65 R$4.73 (1.8%) ↓ R$4.81 R$4.96 (3.0%) Dec
Telmex TMX N/C ↑ $1.44 $1.43 0.2% ↓ $1.49 $1.52 (1.8%) Dec
TIM Brazil TCSL4.SA B/C ↓ R$0.16 R$0.17 (8.7%) ↓ R$0.39 R$0.40 (2.7%) Dec
UnitedHealth Group UNH B/A ↑ $4.00 $3.65 9.5% $3.75 unch -- Dec
Vivo VIVO4.SA B/C ↓ R$3.92 R$3.98 (1.7%) ↓ R$6.04 R$6.20 (2.6%) Dec
Weatherford
WFT N/N ↓ $0.59 $0.61 (3.7%) ↑ $1.20 $1.17 1.9% Dec
International Ltd.
Yahoo! Inc. YHOO N/A ↓ $0.89 $0.92 (2.7%) ↓ $1.09 $1.10 (1.0%) Dec
Other Headlines
Options Research
Weekly Options Watch: Earnings Focus: TXN, MGM, IGT, A, AMGN, CI, MSFT, MYL, KSS 6
Basic Materials
Steel Dynamics Inc. (STLD): Best value among steel producers; appealing valuations - Buy 7
Consumer Cyclicals
Harley-Davidson, Inc. (HOG): A well executed quarter; but still see risk/reward as unfavorable 8
Americas: Entertainment: TV Ratings Monitor: FOX comes close but fails to break CBS's streak 9
Bed Bath & Beyond, Inc. (BBBY): Updating BBBY estimates and price target 10
Consumer Staples
Tupperware Brands Corp. (TUP): First Take: Stock likely to dip on moderate sales shortfall; still
11
Buy
The Coca-Cola Company (KO): Solid fundamentals continue; buyback announcement next
12
catalyst
Energy
Occidental Petroleum Corp. (OXY): Buy on the dip; pullback appears unwarranted 13
Peabody Energy Corp. (BTU): Remains our favorite coal stock on organic growth + JV upside;
14
Buy
Weatherford International Ltd. (WFT): WFT's 3Q reminds us the road to recovery can be rocky;
15
Neutral
Financial Services
Banco Compartamos (COMPARTO.MX): First Take: Solid 3Q2010, in line with GSe, but above
16
consensus
Americas: Banks: Piecing together the put-back risk 17
Healthcare
Stryker Corp. (SYK): 3Q2010: MedSurg and gross margin upside offset Recon weakness 18
Eli Lilly & Company (LLY): FDA's change of "heart" on Bydureon a negative for the industry 19
Johnson & Johnson (JNJ): Lowering estimates on earnings deceleration across the board 20
Boston Scientific Corp. (BSX): Modest top-line growth outlook tempers 3Q2010 EPS upside 21
Forest Laboratories, Inc. (FRX): Near-term EPS upside but focus still on pipeline and cash
22
allocation
Industrials
Parker Hannifin Corp. (PH): FY1Q blowout - last blast for inventory restock? 23
Waste Connections, Inc. (WCN): First Take: 3Q10 EPS beats consensus on stronger volume,
24
margins
Illinois Tool Works (ITW): Lackluster 3Q vs. expectations; maintain Neutral 25
Lockheed Martin Corp. (LMT): Numerous challenges highlighted in 3Q10; reiterate CL-Sell 26
Crown Holding, Inc. (CCK): Solid 3Q results; Buy on accelerating volume growth, strong FCF 27
Technology
Juniper Networks, Inc. (JNPR): Buy on the pullback: Street EPS going up on strong secular
28
growth
Yahoo! Inc. (YHOO): First Take: Heavy buybacks, light 4Q2010 net revenue guide 29
Solera Holdings, Inc. (SLH): Raising estimates on FX; positive takeaways from mgmt meetings 30
Altera Corp. (ALTR): Significant downside to 2011 Street estimates, prefer ALTR to XLNX 31
Telecom Services
NII Holdings (NIHD) Buy: Attractive entry point; upgrade to Buy, add to LatAm Focus List 32
Latin America: Telecom Services: Positioning for 3Q10: 3G driving mobile growth; fixed-
33
line/integrated struggling
Transportation
LLX Logistica (LLXL3.SA): Focus now on the Açu Port; keep Neutral rating on LLX 34
Utilities
American Electric Power (AEP): Ohio a concern but warming up on valuation and dividend hike 35
Reports Published
Americas Morning Summary October 20, 2010
Focus Items
Americas: Retail: The new retail life cycle - focus on capital allocation 1
Matthew J. Fassler (New York): matt.fassler@gs.com, (212) 902-6740
Goldman Sachs & Co.
Adrianne Shapira (New York): adrianne.shapira@gs.com, (212) 357-4174
Goldman Sachs & Co.
Michelle Tan, CFA (New York): michelle.tan@gs.com, (212) 902-3099
Goldman Sachs & Co.
Jonathan Baucom (New York): jonathan.baucom@gs.com, (212) 934-4213
Goldman Sachs & Co.
Ryan Brinkman (New York): ryan.brinkman@gs.com, (917) 343-9516
Goldman Sachs & Co.
John Marshall (New York): john.marshall@gs.com, (212) 902-6848
Goldman Sachs & Co.
Maturing sector demands a new retail life cycle template
The retail life cycle has changed. Most retailers have exited the boom/bust unit growth cycle, and have
reached a state of maturity that demands a heightened focus on allocating free cash flow. Moreover, stable
competitive dynamics enable stronger cash flows, and empower retailers to direct cash back to shareholders.
This matters now. Cash conversion ratios are near long-run peaks; the ratio of cash to enterprise value is at a
peak for the sector; a lurking private equity bid is likely to keep retailers focused on deploying capital
intelligently; and, the emergence of a “new normal,” slow growth macro backdrop should embolden firms to
commit capital more aggressively.
Key decisions revolve around capital allocation
Retailers need to make hard decisions about directions for capital allocation; we do not think investors
appreciate the potential scope and impact of these issues. We have developed a quantitative framework for
matching growth prospects with uses of capital.
Buy these stocks on smart capital allocation
* Buy-rated COST and LULU are allocating capital to expansion, commensurate with promising return and
expansion profiles.
* Buy-rated KSS, LOW, and SPLS are well-positioned to raise dividends in the next 6-12 months.
Increasingly mature retailers should return more capital to shareholders. Only high-growth firms should favor
buybacks with excess cash; we favor dividends – these firms have the capacity to raise payouts given their
cash flows and staying power. Note that investors seeking to preempt dividend hikes can use options to
extract yield, taking advantage of the risk reduction benefits of big cash cushions.
On the radar –candidates to re-enter the growth stage
* Some firms are underinvesting relative to attractive returns and growth prospects; they have the opportunity
to return to the early stage of the retail life cycle, unlocking latent growth opportunity with higher cap-ex
potentially driving multiple expansion. These include Neutral-rated BBBY, COH, KMX, JCG, ROST, and
WSM.
* Conversely, some firms risk taking capital discipline too far, and undermining their franchises with a lack of
investment. Notably, Neutral-rated GPC and HD should consider raising capex to solidify their standing.
Americas: Consumer Staples: Buy MJN, HANS, and LO with M&A picking up; upside to TUP on increased 2
cash returns
Judy E. Hong (New York): judy.hong@gs.com, (212) 902-0490
Goldman Sachs & Co.
Andrew Sawyer, CFA (New York): andrew.sawyer@gs.com, (212) 902-5488
Goldman Sachs & Co.
Jason English (New York): jason.english@gs.com, (212) 902-3293
Goldman Sachs & Co.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Tyler Walling (New York): tyler.walling@gs.com, (212) 934-0495
Goldman Sachs & Co.
Stephanie Whited (New York): stephanie.whited@gs.com, (212) 855-9812
Goldman Sachs & Co.
We highlight 3 Buy names with exposure to the M&A theme; MJN, HANS and LO
Deal activity has picked up in Consumer Staples. We highlight three of our Buy-rated stocks to investors
seeking to participate in this theme:
MJN (CL-Buy) has exposure to high-growth emerging Asian markets in a profitable category, which could
appeal to a deep pool of large-cap Staples and Pharma companies. We rate the shares Conviction Buy.
HANS (Buy) is a secular market share winner in the profitable and growing energy drink category. The larger
beverage companies have below-average exposure to this attractive niche category.
LO (CL-Buy) is another consistent market share growth company with a very attractive cash generation
profile. We believe a potential buyer could generate meaningful cost synergies and could also optimize the
capital structure.
In this report we review our M&A rankings across our coverage.
Increased cash back to shareholders a potential plus for TUP, SJM
In addition to M&A, low interest rates have also created opportunities for better balance sheet deployment
and increased cash returned to shareholders. Our top-down sector analysis shows the potential for 5%-10%
average EPS accretion on an annualized basis if the industry were to move to a 3X gross debt/EBITDA from
1.4X today. We highlight two stocks where we see potential positive changes in uses of cash:
TUP (Buy) is poised to reach a nearly debt-free position during 2011. TUP is unlikely to be acquisitive so we
expect a substantial increase in cash returned to shareholders. We forecast an increase in the dividend from
$1 per share to $2.50-$3.00 by 2012, or a 5%-6% yield.
SJM (Neutral) will be free to repurchase shares beginning in late 2010 after being restricted for the past two
years due to the Folgers transaction. We model the company to buy $200 mn in stock in the current fiscal
year, with potential for $300 mn in annual buyback activity in subsequent years.
UnitedHealth Group (UNH): The next six weeks will drive the 2011-2013 earnings view 3
UNH, $35.30 Matthew Borsch, CFA (New York): matthew.borsch@gs.com, (212) 902-6784
Market cap $39,144 mn
Goldman Sachs & Co.
Sebastian Paquette, CFA (New York): sebastian.paquette@gs.com, (212) 902-5306
Target price $42.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Sam Wass (New York): sam.wass@gs.com, (212) 357-0617
EPS ($) 4.00 3.75 Goldman Sachs & Co.
P/E 8.8X 9.4X
EPS Quarter/Interim* 0.84 0.81
What's changed
Following a strong 3Q for UNH, we raise our 2010E EPS by $0.35 to $4.00, which is $0.05 above the high
Investment Lists end of the company’s revised range of $3.85-$3.95. Even with that revision our new 4Q EPS of $0.84 (vs.
Americas Buy List prior $0.77) is likely to be conservative, as it would represent a 26% sequential decline from 3Q.
Coverage view Attractive With next year’s outlook still in flux pending final reform regulations, we maintain our 2011E EPS at $3.75, -
6% yoy, and 2012E at $4.10, +10% yoy.
*Current and a year ago
Implications
The next six weeks will bring visibility on earnings potential for 2011-2013 as HHS regulators finalize the MLR
rules and UNH provides first-time 2011 guidance at its Nov. 30 investor day. Initial 2011 guidance should be
within a $3.25-$3.75 range, with the final HHS regulations on key details (taxes, state phase-ins, credibility)
driving towards either the low or high end of that range. Either way, we expect a conservative bias on the
initial guidance. Beyond that, we expect UNH will give investors a credible road map to 2012-2013 EPS
growth of at least 10%. If those catalysts are combined with strong GOP gains in the Nov. 2 elections, we
believe UNH stock will rally into year-end. As we move into 2011, UNH and other managed care stocks
should trade on execution in the MLR-regulated environment, as well as investors’ assessment of the political
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
and regulatory environment (the dynamics of the post-2010 election Administration and Congress, as well as
early assessment of the 2012 Presidential election).
Valuation
We maintain our 6-month price target of $42, implying 18% near-term stock upside. Our target is based on
11x our 2011 EPS from our SOP.
Key risks
Key risks include the details of the near-term health reform regulations.
Intuitive Surgical, Inc. (ISRG): Slowing system sales/procedure volumes drive 3Q revenue shortfall 4
ISRG, $279.04 David H. Roman (New York): david.roman@gs.com, (212) 902-7839
Market cap $11,301 mn
Goldman Sachs & Co.
Nikhil Hanmantgad (New York): nikhil.hanmantgad@gs.com, (212) 357-4031
Target price $240.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Topher Orr (New York): topher.orr@gs.com, (212) 902-1017
EPS ($) 8.72 9.89 Goldman Sachs & Co.
Kunal Singh, CFA (Bangalore): kunal.singh@gs.com, (212) 934-6546
P/E 32.0X 28.2X
Goldman Sachs & Co.
EPS Quarter/Interim* 2.10 1.64
Investment Lists
What's changed
Americas Sell List Following Intuitive Surgical’s 3Q2010, we are lowering EPS forecasts for 2010/2011/2012 on the basis of
Coverage view Neutral slower procedure growth and high levels of penetration in US high volume hospitals to $8.72/$9.89/$11.53
from $8.76/$10.02/$11.84. Our 2010E EPS estimate is reduced (despite upside generated in Q3) due to an
*Current and a year ago
expected slowing in procedure volumes in 4Q. Excluding a sharp deceleration in R&D spending, the
company would have generated 190 bp of operating leverage in 3Q2010, by our estimates (the lowest level
since 1Q2009). For 2010, we project procedure volume growth of 31% (around 270K procedures) vs.
management guidance of 35% and down from our previous forecasts of 34%.
Implications
We maintain our Sell rating, as we suspect that our numbers will remain below consensus, given a more
conservative outlook for system placements, procedure volume growth, and the potential for operating
leverage. As penetration levels in large US hospitals (more than 300 beds) reaches peak levels (currently
estimated at around 70%) as well as adoption in key therapeutic categories, we expect revenue growth to
continue to slow, driving downside to sales and earnings forecasts. We do not foresee a sharp adoption
curve in lower volume centers or in non-US regions, given cost pressures and lack of clinical data to support
capital investment. At 28.2X our 2011 EPS estimate (vs. projected EPS growth of 13%), we do not believe
the potential for decelerating growth is priced into the stock. As numbers are revised downward, we expect
P/E multiple compression.
Valuation
We lower our 12-month, P/E- and DCF-based price target to $240 from $2.70 prior on our lower sales and
EPS projections.
Key risks
Greater da Vinci surgical system adoption in smaller hospitals, international expansion, and faster than
expected new product uptake.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Yahoo! Inc. (YHOO): Stuck in land of single-digit revenue growth for a few more quarters 5
YHOO, $15.49 James Mitchell, CFA (New York): james.mitchell@gs.com, (212) 357-1849
Market cap $20,805 mn
Goldman Sachs & Co.
Ingrid Chung (New York): ingrid.chung@gs.com, (212) 902-2360
Target price $17.50
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Jordan Monahan (New York): jordan.monahan@gs.com, (212) 902-1879
EPS ($) 0.89 1.09 Goldman Sachs & Co.
Fred Krom (New York): fred.krom@gs.com, (212) 902-8618
P/E 17.3X 14.2X
Goldman Sachs & Co.
*
EPS Quarter/Interim 0.27 0.24
Investment Lists
What's changed
Neutral Yahoo! reported 3Q GAAP revenue up 2% yoy, 0.5% below our estimate and just below the mid-point of
Coverage view Attractive guidance. Recurring operating income increased 80% yoy, and was 4% below our estimate on higher costs
of revenue. Metrics remained erratic, with page views down 4% yoy and search queries flat yoy in 3Q after
*Current and a year ago
being up 7% yoy in 2Q, attributed to better results first-time. The company guided for weak 4Q revenue ex-
TAC at the mid-point, 1% below our estimate and 4% below consensus, and for 4Q operating income of
$200-280 mn, vs. GS and consensus at c.$265 mn.
Implications
(1) On the negative side, Yahoo! guided for decelerating display ad growth, from 17% yoy in 3Q to 9%-13%
yoy in 4Q, below our prior forecast of 14% yoy. While 4Q2009 is a tough comparison due to year-end budget-
flushing, 1Q2010 was down less sequentially than 1Q2007, 1Q2008, or 1Q2009, suggesting comparisons
will remain tough, and Yahoo! may lag its medium-term target of 13%-16% display revenue growth for some
time.
(2) On the positive side, Yahoo! sees the Microsoft partnership providing upside to its original target of a mid-
single-digit RPS increase, but noted that realizing upside may take until 2Q2011 as Microsoft’s algorithms
drive higher prices per paid click but (due to better relevancy) fewer paid clicks.
(3) Hurt by lower revenue and helped by buybacks reducing the share count, we reduce 2010-2012 EPS
estimates by 1%-3% to $0.89/$1.09/$1.26.
Valuation
Our 6-month target price is unchanged at $17.50 (based on DCF and SOP). We incorporate around $9 per
share in cash and Asian assets (taxed at 40%).
Key risks
Downside: search market share loss and de-rating at Asian affiliates; Upside: better-than-expected
search/display monetization.
Other Headlines
Options Research
Weekly Options Watch: Earnings Focus: TXN, MGM, IGT, A, AMGN, CI, MSFT, MYL, KSS 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.
Insight: Buy Financials options to gain exposure, but limit risk
Financials equities have sharply underperformed the S&P 500 even as XLF options prices have relaxed. In
our view, investors should take advantage of inexpensive options to gain upside exposure with limited risk
ahead of mortgage headlines, the election, Fed meeting and the lifting of the foreclosure moratorium.
Trades: TXN, MGM, IGT, A, AMGN, CI, MSFT, MYL, KSS
Trade #1: Buy TXN calls ahead of 25-Oct earnings
Expectations of market share gain and balanced supply chain are key positives for stock. Options are
inexpensive despite high short interest.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Trade #2: Sell MGM covered strangles to capture yield
Options prices are high despite preannounced earnings and the recent capital raise. Investors should
monetize elevated implied volatility by selling wide January strangles to collect a 14% premium.
Trade #3: Buy IGT puts to hedge ahead of earnings
Our analyst expects IGT 2011 guidance to disappoint investors given elevated consensus expectations.
Shares could be volatile on earnings and G2E in early November. Buy puts to hedge.
Trade #4: Sell Agilent (A) covered calls to generate yield
Strong results and guidance seem to be priced in the stock. Limited upside and elevated implied vol make
covered calls attractive.
Trade #5: Buy AMGN Jan $55/$57.5 strangles for several catalysts
Trade #6: Buy Cigna (CI) calls ahead of key catalysts
Trade #7:Sell MSFT Jan-11 covered calls to increase yield
Trade #8:Buy MYL calls to gain upside ahead of 3Q earnings
Trade #9: Buy KSS calls ahead of capital allocation news, sales
Basic Materials
Steel Dynamics Inc. (STLD): Best value among steel producers; appealing valuations - Buy 7
STLD, $14.05 Sal Tharani (New York): sal.tharani@gs.com, (212) 357-0695
Market cap $2,559 mn
Goldman Sachs & Co.
Sandeep SM (Bangalore): sandeep.sm@gs.com, (212) 934-8155
Target price $17.00
Goldman Sachs India SPL
Fiscal y/e Dec 2010E 2011E Athena Maikish, Ph.D (New York): athena.maikish@gs.com, (212) 357-8894
EPS ($) 0.65 2.00 Goldman Sachs & Co.
P/E 21.5X 7.0X
EPS Quarter/Interim* 0.07 0.12
What's changed
We are tweaking our EPS estimates upward and reiterate our Buy rating on STLD. We raise our 4Q10 EPS
Investment Lists to $0.07 from $0.04 on expectations of lower scrap prices, which should enable higher margins in STLD’s
Americas Buy List steel segment, offset partially by lower margins at its scrap division. Thus our 2010E EPS rises to $0.65 from
Coverage view Neutral $0.62. We maintain 2011E/2012E/Normalized EPS at $2.00/$2.75/$2.50. There is no change to our 6-month
$17 price target (based on P/E, EV/EBITDA and M&A valuation).
*Current and a year ago
Implications
Although STLD expects 4Q10 earnings to be modestly better and believes that it could improve margins
further, we are less optimistic considering the state of steel fundamentals. We estimate STLD’s pre-tax
income will decline sequentially by a third to $21 mn. But we expect Steel Dynamics to be the most profitable
company in our steel producers’ coverage as measured on a profit per ton metric.
We remain buyers of STLD, as we like its vertical integration into scrap and metallics, its entrance into rail
products and its low cost structure, along with its attractive relative valuations. The company has produced
consistently better operating margins than competitors, before and during the downturn. Even in a flattish
demand environment, operating earnings could improve by at least $70 million when the company starts to
break even at its Mesabi and rail divisions during 2011. We are not assuming any positive contribution from
either of these projects currently, which could yield further upside.
Valuation
STLD currently trades at 7.0X 2011 P/E and 4.9X 2011 EV/EBITDA, compared to its carbon peers’ average
of 9.7X and 5.5X, respectively.
Key risks
Downside risks: liquidity issues, nonresidential construction slowdown, overproduction/excess exports out of
China, or a stronger US dollar.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Consumer Cyclicals
Harley-Davidson, Inc. (HOG): A well executed quarter; but still see risk/reward as unfavorable 8
HOG, $30.30 Patrick Archambault, CFA (New York): patrick.archambault@gs.com, (212) 902-2817
Market cap $7,075 mn
Goldman Sachs & Co.
Aditya Oberoi (New York): aditya.oberoi@gs.com, (212) 357-7617
Target price $26.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E
EPS ($) 1.29 2.22 What's changed
P/E 23.5X 13.7X We raise our 2010E/2011E/2012E EPS estimates to $1.29/$2.22/$2.94 from $1.10/$2.16/$2.91, but retain
* our Sell rating on HOG. Our estimate changes reflect: (1) the impact of the 3Q beat, (2) a re-cadencing of
EPS Quarter/Interim 0.00 (0.63)
restructuring costs, (3) a slightly higher production run rate than we had previously modeled, and (4) a higher
Investment Lists level of HDFS profitability. Our 2010 estimate factors in a compression in 4Q gross margin to 25.7% from
Americas Sell List 34.9% reflecting lower shipments, a weaker bike mix, and some incremental raw materials costs. Our six-
Coverage view Attractive
month price target remains unchanged at $26.
Implications
*Current and a year ago
3Q results underscore that restructuring efforts are paying dividends, an area where we still see some upside
risk driven by the possibility of additional efficiencies from previously announced actions at York and
Wisconsin operations and potential future actions at Kansas City.
From our perspective this is more than offset, however, by the downside risk from motorcycle demand. While
we model in 140k units in 2011- a 47% peak to trough decline (consistent with the 1979-1983 downturn)
there is significant uncertainty in this forecast. Using an average 30-year lifecycle, a 1% population growth
rate, and a base of around 2mn Harleys on the road in the US implies replacement demand of roughly 90k,
suggesting downside from our 140k if bike penetration does not increase.
With shares trading at 13x our normalized EPS of $2.38, we believe there is not enough of a discount
factored in to compensate investors for the end-market demand risk they are taking on and as such we
remain Sell rated.
Valuation
We value HOG shares by applying an 11x multiple on our normalized EPS estimate of $2.38.
Key risks
Upside risks include better cost performance and a firming of US sales.
Americas: Entertainment: TV Ratings Monitor: FOX comes close but fails to break CBS's streak 9
Drew Borst (New York): drew.borst@gs.com, (212) 902-7906
Goldman Sachs & Co.
James Mitchell, CFA (New York): james.mitchell@gs.com, (212) 357-1849
Goldman Sachs & Co.
Brian Karimzad (New York): brian.karimzad@gs.com, (212) 357-1745
Goldman Sachs & Co.
Grace Huan (New York): grace.huan@gs.com, (212) 357-8280
Goldman Sachs & Co.
Despite boost from NFL and NLCS, FOX still the runner up
CBS continued its winning streak in Week 4, despite competition from football and baseball. CBS finished the
week with a 2.7 rating, down 7% yoy. Two and a Half Men and The Big Bang Theory were the top-rated
shows on CBS last week. Despite the benefit of an NFL overrun on Sunday and two NCLS playoff games last
week, FOX was unable to push CBS out of the top spot. Games 1 and 2 of the NLCS (Giants vs. Phillies)
were down 22% and 10% yoy, respectively, compared to FOX’s coverage of last year’s ALCS (Yankees vs.
Angels). In addition to differences in the national appeal of the teams, the decline is likely driven by the
ongoing dispute between FOX and Cablevision, which has resulted in FOX pulling its broadcast signal from
nearly 3 mn Cablevision customers in Philadelphia and New York. As a result, nearly 40% of TV households
in New York and 1% of TV households in Philadelphia were unable to watch the NLCS.
Broadcast networks off to slow start this season
Four weeks into the fall season, the major broadcast networks are collectively down 7% yoy. FOX has the
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
worst yoy performance, with a 12% decline in ratings driven by weakness in baseball and returning series.
With the exception of Glee, the majority of returning shows on FOX are showing significant declines. House is
-35%, while Simpsons and Family Guy are off 12% to 15% yoy. Despite strong competition on Thursday
nights, Bones and Fringe have held up comparatively well, with moderate declines of 7% and 9%,
respectively.
ABC has the second-worst performance, with season-to-date ratings 9% lower yoy. Many of the same shows
that suffered ratings declines last year are still seeing deteriorating trends this year. Thursday night anchors
Grey’s Anatomy and Private Practice are down 20% and 25% this season against increasing competition
from NBC and CBS. Key Sunday night shows Desperate Housewives and Brothers & Sisters are off 13% and
10%. Better ratings from Modern Family (+26%), Dancing With the Stars (+22%, +32%), and Castle (+17%)
are the few bright spots in ABC’s prime-time schedule. New shows such as Detroit 1-8-7 and Better With You
have been underwhelming.
Broadcast: Season-to-Date Ratings by Network Ex-Sports
Live-plus-same-day basis through Week 4 (10/17/10): ABC: -5% yoy Total HH / -10% A18-49; CBS: 0% / -
3%; FOX: -12% / -14%; NBC -3% / -5%.
Bed Bath & Beyond, Inc. (BBBY): Updating BBBY estimates and price target 10
BBBY, $43.41 Matthew J. Fassler (New York): matt.fassler@gs.com, (212) 902-6740
Market cap $11,248 mn
Goldman Sachs & Co.
Mark-Andre Saucier-Nadeau (New York): mark-andre.saucier-nadeau@gs.com, (212) 902-3668
Target price $50.00
Goldman Sachs & Co.
Fiscal y/e Feb 2011E 2012E Ryan Brinkman (New York): ryan.brinkman@gs.com, (917) 343-9516
EPS ($) 2.86 3.24 Goldman Sachs & Co.
Jonathan Baucom (New York): jonathan.baucom@gs.com, (212) 934-4213
P/E 15.2X 13.4X
Goldman Sachs & Co.
EPS Quarter/Interim* 0.68 0.58
Investment Lists
What's changed
Neutral We are inching our estimates higher to reflect modest adjustments to footage growth assumptions. Same-
Coverage view Neutral store sales, gross margin, and expense rate forecasts are unchanged.
*Current and a year ago Implications
Our 2010 estimate remains unchanged, but our 2011E and 2012E EPS go to $3.24 and $3.65, respectively,
from $3.22 and $3.62 previously.
We remain Neutral on BBBY shares as EBIT growth story is likely to moderate, as compares normalize with
the cycling of macro weakness and Linen’s closings, and given some building pressure from higher
commodity costs. Note that our sequential sales and profit analysis suggests smaller beats in the quarters
ahead relative to recent showings.
We do acknowledge the improving capital allocation story, which will likely get better as the firm has
ratcheted up buybacks, emboldened by a stabilizing backdrop, and continues to accumulate a massive cash
balance.
Valuation
We raise our 12-month target to $50 from $49 to reflect our revised forecast and the impact of a higher
market multiple on the variable component of our valuation framework. Our price target is derived from a
blend of risk/reward analysis and DCF.
Key risks
Downside: cycling LIN’s demise and strong gross margin performance from last year. Upside: continued
sales momentum.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Consumer Staples
Tupperware Brands Corp. (TUP): First Take: Stock likely to dip on moderate sales shortfall; still Buy 11
TUP, $48.62 Andrew Sawyer, CFA (New York): andrew.sawyer@gs.com, (212) 902-5488
Market cap $3,112 mn
Goldman Sachs & Co.
Stephanie Whited (New York): stephanie.whited@gs.com, (212) 855-9812
Target price $60.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E
EPS ($) 3.63 4.31 News
P/E 13.4X 11.3X Tupperware’s 3Q2010 EPS of $0.64 exceeded our $0.61 forecast and the $0.58 consensus. Upside versus
* the consensus came from better operating margins (+1-2c) and a better tax rate as potential adverse tax
EPS Quarter/Interim 0.61 0.55
legislation did not pass as feared (+5c). Sales growth of 3% was 200-300 bp below our forecast but a more
Investment Lists modest 50 bp below consensus. The company lowered FY sales guidance to 6-7% from 6-8%, but raised its
Americas Buy List full-year EPS outlook to $3.60-$3.65 from $3.51-$3.61.
Coverage view Neutral Analysis
We see a modestly negative read-across from the results:
*Current and a year ago
* The main concern is that organic sales growth slowed to 3%, short of our 5-6% forecast. On the plus-side,
the company is still looking for a pick-up to 4-6% growth in the 4Q, consistent with our 5% forecast.
* Full-year guidance is moving up by $0.06-$0.07 at the midpoint. Favorable forex moves account for $0.11
of the increase, with partial offset from moderately lower sales growth and higher unallocated expenses.
Implications
We expect the stock to trade down moderately on the sales shortfall. Even so, we remain Buyers of any
weakness for three reasons:
(1) TUP remains positioned to sharply increase its dividend (or buybacks) in 2011 as debt falls below its
target, which is a catalyst for P/E expansion.
(2) Consensus estimates still need to move higher from favorable forex.
(3) We expect the sales softness to prove short-lived. Much of the 3Q miss came from a sharp -36% decline
in CIS, with the company citing the fires/heat wave in Russia that should not recur. The balance of the
emerging market portfolio continued to post strong growth.
Our price target and estimates are unchanged. The company is hosting a conference call at 10am on
Wednesday.
The Coca-Cola Company (KO): Solid fundamentals continue; buyback announcement next catalyst 12
KO, $60.00 Judy E. Hong (New York): judy.hong@gs.com, (212) 902-0490
Market cap $139,620 mn
Goldman Sachs & Co.
Tyler Walling (New York): tyler.walling@gs.com, (212) 934-0495
Target price $68.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E
EPS ($) 3.50 3.90 What's changed
P/E 17.1X 15.4X KO reported 3Q10 EPS of $0.92, $0.03 ahead of the consensus estimates. The beat was driven mostly by
better than expected volume growth of 5%. KO also upped its share buyback plan by $500 mn to $2.0 bn for
EPS Quarter/Interim* 0.73 0.66
2010.
Investment Lists
Implications
Americas Buy List We believe that 3Q10 results support our positive thesis on the KO story as solid volume growth, positive
Coverage view Attractive price/mix and cost savings are driving strong underlying profit growth. First, 3Q10 marks a second
consecutive quarter of 5% unit growth and we forecast that KO can continue to sustain 4%-5% growth driven
*Current and a year ago
by developing/emerging market growth where per capita growth is expanding and KO is gaining market
share. We point to volume acceleration in key markets such as Russia (+30%) and China (+12%) along with
high levels of sustained growth in Brazil (+13%) as key positives. In addition, we are encouraged by the
progress KO is making in the US, as KO has stepped up marketing investments and is driving incremental
transactions through new price/packaging. Second, we believe KO is set to grow underlying EPS in 2011 at a
healthy 10%+ rate driven by sustained unit growth, cost saves, and more aggressive cash deployment
toward share repurchases. We believe KO has ample opportunity to accelerate buybacks in 2011 given its
current $4.50/share in cash ($10.5 bn) and $3 bn of estimated free cash flow after dividend next year.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
We trim our 2010 EPS to $3.50 from $3.53 to reflect the shift in timing of G&A expenses, higher marketing
spending and lower interest income in 4Q10. We increase our 2011/ 2012 EPS to $3.90/$4.28 from $3.88/
$4.27 to reflect a greater share buyback amount than we previously modeled.
Valuation
Our 12-month P/E derived price target of $68 remained unchanged.
Key risks
Stepped up competition, weaker global macros.
Energy
Occidental Petroleum Corp. (OXY): Buy on the dip; pullback appears unwarranted 13
OXY, $81.20 Arjun N. Murti (New York): arjun.murti@gs.com, (212) 357-0931
Market cap $65,954 mn
Goldman Sachs & Co.
Joe Citarrella (New York): joe.citarrella@gs.com, (212) 902-6787
Target price $95.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Will Su (New York): will.su@gs.com, (212) 357-9301
EPS ($) 5.93 9.40 Goldman Sachs & Co.
P/E 13.7X 8.6X
EPS Quarter/Interim* 1.83 1.30
What's changed
Occidental Petroleum reported adjusted 3Q2010 EPS of $1.47 versus our estimate and the First Call
Investment Lists consensus of $1.35. The variance with us was primarily due to higher-than-expected Midstream and
Americas Buy List Chemicals income partially offset by lower-than-expected E&P earnings. We make minor changes to our
Americas Conviction Buy List 2010-2015 EPS estimates for Oxy; our new forecasts are $5.93/$9.40/$13.10/$11.60/$13.35/$15.35 versus
Coverage view Attractive $5.80/$9.25/$12.80/$12.00/ $13.61/$14.87 before.
*Current and a year ago Implications
We reiterate our Conviction Buy on Oxy shares and would especially use the 5% post-earnings selloff as an
opportunity to add to positions. In our view, Oxy has now addressed two key concerns otherwise weighing on
the stock recently: (1) corporate governance and leadership succession and (2) avoiding a repeat Phibro
trading unit loss in 3Q. Unfortunately, with California E&P production below expectations for a second straight
quarter and the company announcing additional E&P acquisitions, management did not improve confidence
in its E&P production outlook as we thought it would. In our view, the 2Q and 3Q California volume miss is a
function of temporary “above ground” challenges rather than a sign of “below ground” problems; acquisitions
have long been part of Oxy’s strategy and we struggle to understand the surprise. Among large-cap oil
companies, we continue to believe Oxy is on-track to deliver top quartile long-term E&P production growth,
returns on capital, and free cash flow.
Valuation
We see 19% upside to our unchanged, $95, six-month price target based on asset value and cash flow
valuation analyses.
Key risks
Key risks to our view and price target are oil price volatility and E&P project disappointments.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Peabody Energy Corp. (BTU): Remains our favorite coal stock on organic growth + JV upside; Buy 14
BTU, $50.53 Brian Singer, CFA (New York): brian.singer@gs.com, (212) 902-8259
Market cap $13,552 mn
Goldman Sachs & Co.
Andre Benjamin (New York): andre.benjamin@gs.com, (212) 855-0470
Target price $60.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Pavan Hoskote (New York): pavan.hoskote@gs.com, (917) 343-9044
EPS ($) 3.12 4.61 Goldman Sachs & Co.
P/E 16.2X 11.0X
EPS Quarter/Interim
*
0.93 0.34
What's changed
Peabody reported adjusted 3Q10 EPS/EBITDA of $0.99/$567 mn vs our $0.94/$535 mn and FC $0.91/$526
Investment Lists mn. The beat vs our estimate was largely driven by higher PRB volumes, higher trading EBITDA (as activity
Americas Buy List in Asia continues to grow) and better cost control in Australia. 2010-2011 volume guidance was largely
Coverage view Attractive unchanged, though management indicated 2010 domestic volumes would be near the high end of a 185-195
MM tons range, while Australian production would be near the lower end of a 27-29 MM tons range. In
*Current and a year ago
Australia, management indicated most of the adverse weather impact to volumes is due to port/rail
challenges and not issues at its mines. Management also appeared to share our concern PRB prices could
soften from current levels ($14-$15/ton) without demand increases if there are additional production
increases. 2010-2012 EPS is now $3.12/$4.61/$5.17 from $3.06/$4.63/$5.10 on minor cost/volume/realized
price adjustments.
Implications
Buy-rated Peabody Energy remains our favorite coal stock due to: (1) exposure to growing domestic and
international markets; (2) EPS upside from pending Asia JVs; and (3) attractive B/S flexibility. At a time when
many coal companies are generating record cash flows but becoming increasingly dependent on M&A to
sustain growth, Peabody is one of the few companies with attractive organic reinvestment opportunities in
multiple regions. Valuation remains attractive relative to historical levels and peers given its attractive growth
profile and above average returns.
Valuation
We see 16% upside to our $60 6-month multiples based target price. BTU trades at 5.8x 2-yr roll fwd
EV/EBITDA vs a 6.8x historical average, 5.3x for CNX, 4.9x for ACI and 4.0x for ANR.
Key risks
Weak China demand datapoints, less attractive than expected JV terms, weaker volumes from adverse
weather and gov’t pronouncements.
Weatherford International Ltd. (WFT): WFT's 3Q reminds us the road to recovery can be rocky; Neutral 15
WFT, $17.18 Daniel Boyd, CFA (New York): daniel.boyd@gs.com, (212) 357-1804
Market cap $12,905 mn
Goldman Sachs & Co.
Dimitry Dayen, CFA (New York): dimitry.dayen@gs.com, (212) 855-0497
Target price $19.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Kyle Jenke (New York): kyle.jenke@gs.com, (917) 343-3196
EPS ($) 0.59 1.20 Goldman Sachs & Co.
P/E 29.3X 14.4X
EPS Quarter/Interim
*
0.24 0.02
What's changed
WFT reported adjusted 3Q10 EPS of $0.18 vs. GS of $0.19 and consensus of $0.17. International operating
Investment Lists income missed our expectations by 19% while North America EBIT beat our forecast by 14%. We adjusted
Neutral our 2010-2012 EPS estimates by -4%/+2%/-4% to $0.59/$1.20/$1.62.
Coverage view Neutral Implications
*Current and a year ago
WFT posted relatively in-line, but messy, results with EBIT just 5% below our estimate and seemingly
optimistic EPS guidance of $1.30 for 2011. While typically thought of as a levered vehicle to invest in
international growth, the WFT story is now much more about North America (54% of EBIT in 3Q and 49% in
2011E). This is not necessarily a negative in our view given the newfound sustainability of liquids activity;
however, the disappointment in 3Q suggests that international execution issues are likely to linger.
The industry is likely to experience a number of project start-ups and mobilizations over the next few
quarters, WFT included, which will set the stage for growth in 2011 and 2012. However, given WFT’s smaller
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
scale and thin margins, any disruptions will likely impact WFT more than peers.
All in all, we believe that WFT will have its day in the sun, but 3Q results remind us that the path to recovery
is likely to be rocky until there is a strong recovery in the broader international market. This increasingly looks
like a mid-2011 event, and while that is not that far away, we prefer to recommend companies with better
execution profiles (HAL/SLB), especially given that WFT is trading at a premium to HAL on most metrics.
Valuation
WFT is trading at 4%/6% premium to peers on 2011E P-E/EV-EBITDA. Our 6-month, EBITDA-based price
target of $19 is unchanged.
Key risks
Downside: weaker commodities, poor execution; upside: strong execution.
Financial Services
Banco Compartamos (COMPARTO.MX): First Take: Solid 3Q2010, in line with GSe, but above consensus 16
COMPARTO.MX, P$89.91 Jason B. Mollin (Sao Paulo): jason.mollin@gs.com, +55(11)3371-0871
Market cap P$37,366 mn
Goldman Sachs Brasil Bco Múlt S.A.
Carlos G. Macedo (Sao Paulo): carlos.macedo@gs.com, +55(11)3371-0887
Target price P$96.10
Goldman Sachs Brasil Bco Múlt S.A.
Fiscal y/e Dec 2010E 2011E Wesley Okada (Sao Paulo): wesley.okada@gs.com, +55(11)3371-0875
EPS (P$) 4.48 5.60 Goldman Sachs Brasil Bco Múlt S.A.
P/E 20.0X 16.0X
EPS Quarter/Interim* 1.16 0.86
News
Compartamos’s 3Q2010 net income of P$491 million (EPS P$1.18) was 1.9% above GSe, but 7.3% above
Investment Lists Bloomberg consensus. The company reported an ROE of 40.9% which was slightly above our estimate of
Neutral 40.2%. Management will host a conference call on Wednesday, October 20th, at 10am Eastern Time (1 888
Coverage view Attractive 335-5539; password: 99686662)
*Current and a year ago
Analysis
Solid loan portfolio growth. Compartamos delivered robust total loan growth of 24.2% yoy, on the back of
group lending (Credito Mujer) which increased 23% yoy and home improvement loans (Credito Mejora Tu
Casa) which grew 33% yoy.
NIM remains resilient. Compartamos is a liability-sensitive bank. As such, the company benefits from the
current low interest rate environment. Additionally, Compartamos was able to maintain lending rates of
roughly 70% per year, which contributed to the 61.4% net interest margin in the 3Q10 (an increase from
59.7% in 2Q10).
Asset quality improved in the quarter. The NPL ratio declined to 1.97% in 3Q10 from 2.19% in 2Q10, driven
by a significant improvement in the group lending product, which reported a 19 bp decrease qoq to 0.77%.
Better efficiency ratio. As part of Compartamos’ labor intensive business model, the company added 1,863
employees over the past year (+25.6% yoy) to support its 23.1% growth in total clients. However, the bank
was able to deliver a 133 bp yoy decrease in its efficiency ratio, mainly derived from the recently
implemented cost-control policies.
Implications
Compartamos reported a solid 3Q10, with EPS 1.9% above GSe. The bank was able to deliver a
combination of strong loan growth, better asset quality and improving cost efficiencies. However, we maintain
our Neutral rating based on valuation as COMPARTO.MX trades at a 2011E P/E of 16.0X and 2011E P/BV
of 5.5X. Our price target is unchanged.
Americas: Banks: Piecing together the put-back risk 17
Richard Ramsden (New York): richard.ramsden@gs.com, (212) 357-9981
Goldman Sachs & Co.
Ryan M. Nash, CFA, CPA (New York): ryan.nash@gs.com, (212) 902-8963
Goldman Sachs & Co.
Soumil Zaveri (New York): soumil.zaveri@gs.com, (212) 902-8484
Goldman Sachs & Co.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Focus on put-backs overshadows core EPS
Despite reporting 3Q10 EPS ahead of expectations (core EPS of $0.30 ex. reserve release), BAC’s stock
underperformed on fears of elevated private label put-backs, particularly that several large investors were
trying to force BAC to repurchase $47 bn of PLS. We recognize that there are still a large number of
unknowns in assessing the ultimate liability from put-backs. That said, our base-case analysis implies that
losses from mortgage put-backs is around $11 bn versus a total market cap loss of $17 bn since the issue
has come to focus. Importantly, we believe that put-back costs will be spread over a number of years, making
this issue more of an earnings versus a capital issue.
Updating aggregate loss estimates
We estimate that total losses could reach around $25 bn (with $6 bn from GSEs, $3.5 bn from monoclines,
and $15 bn from private label investors). However this is partially offset by $7.1 bn of losses which has either
been provisioned for or charged off to date. Tax affecting the loss reduces the amount to about $11 bn.
Private label: mix matters
The most important assumption is total private label losses (including monoline wraps), which we peg at just
under $20 bn. While investors are focusing on the $450 bn of exposure to whole loan/PLS, almost half of the
exposure is in prime jumbo loans, which should experience lower loss severity and hence lower potential put-
back risk. While remaining exposure remains susceptible to repurchase requests, we believe losses will
remain manageable.
Bottom line: we continue to like BAC
BAC’s shares are now trading at less than 7X our 2011 EPS estimate of $1.75. And, after reporting core EPS
(ex. reserve releases) of $0.30 in 3Q, the stock is trading at less than 10X its current earnings run-rate. While
the put-back issue is expected to remain a headwind in the near term, we believe the recent move represents
implied losses well above our current estimates. While we recognize the uncertainty over the final impact, we
believe that the market is discounting significant risk.
Healthcare
Stryker Corp. (SYK): 3Q2010: MedSurg and gross margin upside offset Recon weakness 18
SYK, $50.07 David H. Roman (New York): david.roman@gs.com, (212) 902-7839
Market cap $20,048 mn
Goldman Sachs & Co.
Nikhil Hanmantgad (New York): nikhil.hanmantgad@gs.com, (212) 357-4031
Target price $54.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Topher Orr (New York): topher.orr@gs.com, (212) 902-1017
EPS ($) 3.31 3.66 Goldman Sachs & Co.
Kunal Singh, CFA (Bangalore): kunal.singh@gs.com, (212) 934-6546
P/E 15.1X 13.7X
Goldman Sachs & Co.
*
EPS Quarter/Interim 0.80 0.69
Investment Lists
What's changed
Neutral Stryker’s 3Q2010 results mirrored numbers reported by J&J within reconstructive implants (58% of sales);
Coverage view Neutral however, this was more than offset by strength in SYK’s MedSurg business (42% of sales). Still, excluding
Ascent, the business grew 10% against an 8% decline comp. On the Recon side of the business, SYK was
*Current and a year ago
able to offset some of the end-user market weakness with share gains (hips, 17% of sales), but overall
growth still slowed 10 bp to 1.3% constant currency. The gross margin outpaced our estimate by 70bp due to
manufacturing efficiencies and the roll-off of certain investment spending, in our view. We raise our
2010/2011/2012 EPS forecasts from $3.29/$3.62/$3.91 to $3.31/$3.66/$3.95, as a result of increased top-
line growth and gross margins.
Implications
3Q2010 was the second consecutive quarter characterized by weak Recon sales and strong MedSurg
results. It is evident that Stryker’s diversification has been an advantage, but we question whether normalized
growth in MedSurg will exceed 5%-6%. This drives long-term revenue growth at the 5% level excluding
acquisitions and currency. As such, we project a 2010E-2013E EPS CAGR of 9.2%, which assumes limited
use of cash allocated to share repurchases. At 13.7X 2011E EPS (12.8X, excluding net cash) against a
three-year EPS CAGR below 10%, we see the stock as fairly valued and maintain our Neutral rating. With
shares of SYK up 16% since September 1 vs. the S&P Healthcare Equipment Index up 12%, we think the
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
market is pricing in long-term growth that we believe will prove too high.
Valuation
We raise our 12-month price target (based on DCF and P/E) to $54 from $53 on the basis of higher EPS
forecasts.
Key risks
Downside risks: pricing pressure in orthopaedic implants, slowing demand overseas, share loss. Upside
risks: synergistic acquisition, increased return of cash to shareholders, recovery in key markets.
Eli Lilly & Company (LLY): FDA's change of "heart" on Bydureon a negative for the industry 19
LLY, $37.45 Jami Rubin (New York): jami.rubin@gs.com, (212) 357-7536
Market cap $41,158 mn
Goldman Sachs & Co.
Florence Tsang, CFA (New York): florence.tsang@gs.com, (212) 357-3567
Target price $32.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E
EPS ($) 4.64 4.62 News
P/E 8.1X 8.1X Eli Lilly and its partners Amylin and Alkermes announced this evening that they received a complete
response letter for Bydureon. The news comes as a significant surprise as the companies and Street widely
EPS Quarter/Interim* 1.14 1.20
anticipated approval on the Oct 22 PDUFA. We had estimated $59 mn this year, rising to $1.0 bn by 2015
Investment Lists (LLY’s 50% economics). The FDA requested a thorough QT (tQT) study with exposures of exenatide
Americas Sell List consistent with those of renally impaired patients. FDA also requested the results of DURATION-5 (study
Coverage view Neutral
already completed), which is the mirror study of DURATION-1 using the commercial scale material. The
companies aim to submit their reply by the end of 2011. However, this may be a conservative goal, as the
*Current and a year ago study design will need to be agreed with FDA, and the companies have not yet spoken with FDA post CRL.
Analysis
More importantly, the issue may not be specific to Bydureon or exenatide, but rather the companies’
understanding is that this tQT study is required for all new diabetes drugs before FDA approval. (BMY’s dapa
has been held up for the same reason). What is most surprising is that this study/QT concerns were not
previously raised in the companies’ discussions with FDA, and only first revealed as an approvability issue in
the Oct-2010 CRL. Previous discussions with FDA indicated that the QT assessment in the DURATION-1
study was acceptable to satisfy the requirement, and was submitted in May-09. However, in a roundabout,
FDA now requests a controlled tQT study, not a QT assessment as part of a pivotal study. No CV issues
have been seen in any DURATION studies, or any preclinical or in-vitro studies. Moreover, its predecessor
Byetta has been on the market for years and not shown any CV issues. Clearly, the risk to Bydureon is a
finding of a QT issue which won’t be known until studies are completed. Our sales estimates are under
review.
Implications
We view the news as a negative sign for the entire industry, as it is a strong signal of an ever more cautious
and safety-focused FDA and evidence of an ever more difficult operating environment. PT is unchanged.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Johnson & Johnson (JNJ): Lowering estimates on earnings deceleration across the board 20
JNJ, $63.29 Jami Rubin (New York): jami.rubin@gs.com, (212) 357-7536
Market cap $173,959 mn
Goldman Sachs & Co.
Florence Tsang, CFA (New York): florence.tsang@gs.com, (212) 357-3567
Target price $60.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E
EPS ($) 4.76 4.90 What's changed
P/E 13.3X 12.9X We lower our estimates on JNJ’s 3Q earnings, which showed a deceleration across most of its business
* segments. This represents the second sequential quarter of disappointing results. JNJ’s MD&D business unit
EPS Quarter/Interim 1.23 1.20
showed weakness nearly across the board, even relative to the tempered expectations after 2Q2010
Investment Lists earnings. The consumer business also showed deceleration in several businesses outside the OTC business
Neutral (expected weakness), suggesting the pressures have spread beyond OTC, which continues to be under
Coverage view Neutral
resolution. The Pharma business reported in-line results, although we note that Rx trends show new
launches to still be weak, and its base pharma business continues to erode. We now project 2010 estimates
*Current and a year ago of $4.76 (prev. $4.71) due to the quarter’s beat on lower costs, one-time gains and a lower tax rate. We have
lowered future estimates, and now forecast 2011 EPS of $4.90 (prev. $5.06), 2012 EPS of $5.20 (prev.
$5.45) and 2013 EPS of $5.59 (prev. $5.80).
Implications
We view today’s results as evidence of a tougher operating environment, for which it will likely take time to
ease (if at all). JNJ cited the weak economy leading to MD&D segment’s lower elective procedures and the
recent discontinuation of COBRA benefits to the unemployed in US. However, managed care companies
indicate that weakness is due to payors pushing back on procedures/devices, suggesting the decline may be
more than cyclical (and not entirely temporary). While the OTC recall and continued remediation at the still
closed Port Washington facility were expected pressures on JNJ’s OTC business, the 3Q decline was worse
than 1Q and 2Q. Deceleration was also seen in several other consumer businesses such as skin care and
women’s health due to increased competitive pressures and slower growth.
Valuation
We maintain our 12-month price target of $60, based on 12X our 2011 EPS.
Key risks
Protracted weakness in major businesses, better than expected pipeline. execution.
Boston Scientific Corp. (BSX): Modest top-line growth outlook tempers 3Q2010 EPS upside 21
BSX, $5.97 David H. Roman (New York): david.roman@gs.com, (212) 902-7839
Market cap $9,074 mn
Goldman Sachs & Co.
Nikhil Hanmantgad (New York): nikhil.hanmantgad@gs.com, (212) 357-4031
Target price $5.50
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Topher Orr (New York): topher.orr@gs.com, (212) 902-1017
EPS ($) 0.38 0.41 Goldman Sachs & Co.
Kunal Singh, CFA (Bangalore): kunal.singh@gs.com, (212) 934-6546
P/E 15.8X 14.7X
Goldman Sachs & Co.
EPS Quarter/Interim* 0.12 0.12
Investment Lists
What's changed
Americas Sell List Following Boston Scientific’s 3Q2010 earnings release, we are lowering our sales forecasts for 2010-2013E
Coverage view Neutral to reflect (1) lost market share in Pacemakers/Electrophysiology (10% of sales combined), (2) competitive
and macro economic pressures in Endosurgery (20% of sales), and (3) share loss in Neurovascular (4% of
*Current and a year ago
sales). That said, our 2010-2013E EPS estimates are increased as a result of more favorable product mix, a
faster-than-expected recovery in the US implantable defibrillator business (ICDs, 20% of sales) following the
March 2010 ship hold, and effective cost management. We raise our 2010/2011/2012/2013 adjusted EPS
estimates (ex-amortization) to $0.63/$0.61/$0.69/$0.77 from $0.57/$0.59/$0.66/$0.75.
Implications
We maintain our Sell rating. Longer term, we continue to question the sustainability of growth in the
company’s core end-user cardiovascular device markets (42% of sales), given increased pricing pressure.
On a more positive note, we think Boston Scientific’s approach to target multiple therapeutic categories
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
through a combined salesforce could prove effective. The company is more aggressively trying to structure
its business to benefit from hospital vendor consolidation compared to the peer group. Nevertheless, we think
Boston Scientific’s key challenge remains product flow and business mix (50% of revenues is in markets that
we do not believe are growing more than 1%-3%). We await further details at the company’s November 19,
2010, analyst meeting to reassess the potential for top-line acceleration associated with international
expansion and the launch of pipeline products.
Valuation
We raise our 12-month price target (based on P/E, EV/EBITDA, and DCF) to $5.50 from $5.25 prior on
higher EPS forecasts.
Key risks
Share gains in ICDs; greater cost savings; and faster new product uptake.
Forest Laboratories, Inc. (FRX): Near-term EPS upside but focus still on pipeline and cash allocation 22
FRX, $33.02 Randall Stanicky, CFA (New York): randall.stanicky@gs.com, (212) 357-3292
Market cap $9,959 mn
Goldman Sachs & Co.
Gregory Waterman, CFA (New York): gregory.waterman@gs.com, (212) 855-7725
Target price $33.00
Goldman Sachs & Co.
Fiscal y/e Mar 2011E 2012E Stephan Stewart (New York): stephan.stewart@gs.com, (212) 934-4218
EPS ($) 3.95 4.30 Goldman Sachs & Co.
P/E 8.4X 7.7X
EPS Quarter/Interim* 1.01 0.97
What's changed
Forest’s F2Q2011 report reinforced our view that near-term earnings will see support (our F2011 EPS
Investment Lists remains above updated guidance), but the core share price drivers remain execution on the pipeline and
Neutral cash allocation. We continue to believe that management is in a unique position to unlock material value
Coverage view Neutral should we see a more aggressive use of cash, but without more clarity on potential action, we remain on the
sidelines. In terms of the pipeline, the approval and launch of ceftaroline is the next key catalyst. We see
*Current and a year ago
approval as highly likely, however, in our view use is more likely in second line against management’s view of
first line use. There is no change to our Neutral rating.
Implications
Our EPS estimates rise for F2011, but our changes are mixed thereafter given higher sales and lower tax,
offset by higher assumptions for SG&A spend after F2011. Our sales estimates move higher for mature
products (Lexapro and Namenda) and lower for newer launches (Savella and Bystolic), reflecting results in
the quarter and current prescription trends. Our SG&A assumptions move lower for F2011, but higher
thereafter as we assume incremental spending to support new launches. For R&D, we assume lower
spending in the quarter was tied to milestone timing and leave our longer-term spending assumptions
essentially unchanged. Our new F2011-F2014 EPS estimates are $3.95, $4.30, $1.44, and $1.82,
respectively (from $3.84, $4.32, $1.47 and $1.81).
Valuation
Our 12-month $33 price target is unchanged and is based on a combination of P/E and EV/EBITDA.
Key risks
Upside risks include more aggressive cash allocation, while downside risks include pipeline failure relative to
our risk-adjusted forecasts.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Industrials
Parker Hannifin Corp. (PH): FY1Q blowout - last blast for inventory restock? 23
PH, $75.08 Terry Darling (New York): terry.darling@gs.com, (212) 357-0379
Market cap $12,321 mn
Goldman Sachs & Co.
Adam Samuelson (New York): adam.samuelson@gs.com, (212) 902-6764
Target price $92.00
Goldman Sachs & Co.
Fiscal y/e Jun 2011E 2012E Eddie Szeto, CFA (New York): eddie.szeto@gs.com, (212) 357-3320
EPS ($) 6.05 7.10 Goldman Sachs & Co.
Ankit Rastogi (Bangalore): ankit.rastogi@gs.com, (212) 934-6798
P/E 12.4X 10.6X
Goldman Sachs India SPL
*
EPS Quarter/Interim 1.40 0.64
Investment Lists
What's changed
Neutral PH reported FY1Q2011 EPS of $1.51, well above our/consensus estimates of $1.15/ $1.05 with revenues/op
Coverage view Attractive profit +7%/ +23% vs. GS. Key variances: (1) non-recurring tax and FX benefits +$0.13, (2) stronger N.
America (+$0.14)and International (+$0.22) Industrial performance, (3) weaker Aero margins (-$0.07), and
*Current and a year ago
(4) stronger CIC +$0.02. FY2011 EPS guidance was raised to $5.20-$5.80 from $3.60-$4.40 vs.
GS/consensus of $4.95/ $4.53. We raise our FY2010-12 EPS estimates to $6.05/ $7.10/ $8.30 from $4.95/
$6.00/ $7.00 and maintain our Neutral rating.
Implications
We attribute stronger performance at PH to factors including: (1) greater inventory restock benefits - PH
highlighted stronger distribution sales (positive margin mix) and we think pending price increases in October
(Europe) and January (N. America) to counter material inflation may be driving customers to over-build some
component stock near term, (2) greater operating leverage resulting from 2009 cost cutting and ongoing
productivity discipline, and (3) share gains. We have not been positive enough on PH (+39% YTD vs. +16%
for the group); we under-estimated revision strength and over-estimated early-cycle multiple compression
risk. We see new guidance as still beatable, though consensus likely gets more aggressive as well. Balance
sheet optionality is among the best in the group, though the impact is more likely 2012 than 2011. On
balance, longer-term risk/reward has clearly improved, though near-term profit-taking across the group may
create a better entry point down the line.
Valuation
We raise our 12-month target from $76 to $92 (14x CY2011 EPS of $6.53 vs. $5.43 previously).
Key risks
Upside risks include share gains and accretive M&A while downside risks include value gap and customer
destock in 1HCY11.
Waste Connections, Inc. (WCN): First Take: 3Q10 EPS beats consensus on stronger volume, margins 24
WCN, $40.05 Richard Skidmore, CFA (New York): richard.skidmore@gs.com, (212) 357-5509
Market cap $3,151 mn
Goldman Sachs & Co.
Alex Ovshey (New York): alex.ovshey@gs.com, (212) 902-6751
Target price $40.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Usha Chundru (Bangalore): usha.chundru@gs.com, (212) 934-5057
EPS ($) 1.87 2.20 Goldman Sachs India SPL
P/E 21.5X 18.2X
EPS Quarter/Interim
*
0.53 0.44
News
Waste Connections (WCN) reported 3Q2010 EPS of $0.53, beating consensus expectations of $0.51, but in
Investment Lists line with our estimate. WCN’s 3Q2010 results exceeded management’s revenue and EBITDA expectations
Neutral on significantly stronger volume growth. WCN reported volumes increased 3.2% yoy in 3Q2010 compared to
Coverage view Neutral their initial forecast of 0.5%-1.0% growth. WCN also announced a 3-for-2 stock split and initiated a quarterly
dividend of $0.075 per share for shareholders of record on October 29, 2010. We had not been expecting
*Current and a year ago WCN to initiate a dividend.
Analysis
Operationally, WCN had a very strong quarter, reporting record revenue and EBITDA. WCN’s 3Q2010
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
revenue and EBITDA exceeded our forecasts by 1.3% and 1.7%, respectively, as volume growth was
significantly higher than expected (+3.2% vs. our estimate of +1.8%). WCN’s pricing was +2.6% yoy – inline
with our forecasts. WCN reported it’s highest ever EBITDA margin at 32.9% vs. our estimate of 32.7%.
Despite WCN’s operating results exceeding our forecasts, WCN reported 3Q2010 EPS that was inline with
our $0.53 estimate as WCN’s tax rate was 124 bps higher than expected. We estimate the higher tax rate
negatively impacted EPS by $0.01 relative to our forecast. Most important, WCN generated $67 million of
free cash flow in the quarter, which the company used to buy back $33 mn of stock, pay down $23 mn in
debt, and spend $14 mn on acquisitions.
Implications
We view WCN’s 3Q2010 results, stock buyback and dividend increase as a positive for the stock as it shows
solid waste volumes have turned positive, demonstrates WCN’s focus on returning cash to shareholders as
well as ability to continue to grow the business. We see the better than expected volume growth as a positive
read-across to other solid waste companies: Republic Services and Waste Management. Our EPS estimates
and price target are unchanged. WCN will host its 3Q2010 conference call at 8:30AM (ET) Wednesday
morning.
Illinois Tool Works (ITW): Lackluster 3Q vs. expectations; maintain Neutral 25
ITW, $46.48 Terry Darling (New York): terry.darling@gs.com, (212) 357-0379
Market cap $23,533 mn
Goldman Sachs & Co.
Adam Samuelson (New York): adam.samuelson@gs.com, (212) 902-6764
Target price $50.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Eddie Szeto, CFA (New York): eddie.szeto@gs.com, (212) 357-3320
EPS ($) 3.12 3.70 Goldman Sachs & Co.
Ankit Rastogi (Bangalore): ankit.rastogi@gs.com, (212) 934-6798
P/E 14.9X 12.6X
Goldman Sachs India SPL
EPS Quarter/Interim* 0.83 0.98
Investment Lists
What's changed
Neutral ITW 3Q10 EPS of $0.83 included $0.02 of favorable corporate items and a $0.01 gain on a divestiture that
Coverage view Attractive enabled a $0.01 headline beat vs. GS/ consensus. Revenues were in line with our estimate and op. profit
excluding favorable corporate items was 1% light. Guidance was $0.72-$0.84. Segment performance above
*Current and a year ago
our estimates were Transportation (+$0.01 on stronger auto production and cost cutting benefits) and Food
Equipment (+$0.02 on stronger margins also resulting from cost cutting). Power Systems (-$0.01 on weaker
margins) and Construction Products (-$0.01 on weaker revenues resulting from softer resi activity and
margins) were below our estimates, with other segments in line. ITW adjusted 2010 EPS guidance to $3.03-
$3.11 from $2.86-$3.12 (adding back $0.04 1Q charge), with 4Q expected at $0.74-$0.82 vs. prior
GS/consensus of $0.82/$0.79. We are raising our 2010-12 EPS estimates to $3.12/ $3.70/ $4.35 from $3.10/
$3.60/ $4.25 due to stronger 3Q results in 2010 and FX benefits in 2011-2012. Our 12-month price target
remains at $50 (13.5X 2011E P/E vs. 14X previously on above-average early cycle exposure).
Implications
Despite the 5.5% sell-off on Tuesday, we maintain our Neutral rating on ITW shares, as we continue to prefer
valuation risk/reward, portfolio exposures, and balance sheet optionality in other names in our sector. We
expect sentiment to remain muted near term in the absence of a reacceleration in ITW’s early cycle end
markets (auto, residential construction) to drive estimate revisions.
Valuation
ITW is trading at 14.9X/12.6X 2010E/2011E P/E, -7%/-7% to peers vs. a historical range of -15% to +20%.
Key risks
Upside risks include stronger/weaker early-/late-cycle end markets. Downside risks include value gap and
M&A integration.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Lockheed Martin Corp. (LMT): Numerous challenges highlighted in 3Q10; reiterate CL-Sell 26
LMT, $69.47 Noah Poponak, CFA (New York): noah.poponak@gs.com, (212) 357-0954
Market cap $25,280 mn
Goldman Sachs & Co.
Chun-Yai Wang (New York): chun-yai.wang@gs.com, (212) 902-9610
Target price $63.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Alexandria Carroll (New York): alexandria.carroll@gs.com, (212) 902-7894
EPS ($) 7.00 6.25 Goldman Sachs & Co.
P/E 9.9X 11.1X
EPS Quarter/Interim
*
2.07 2.17
What's changed
LMT reported 3Q10 segment operating profit below our estimate, reduced 2010 EPS guidance, and provided
Investment Lists color on 2011 that implied significant downside to consensus estimates.
Americas Conviction Sell List We continue to believe the market does not fully appreciate that Defense fundamentals are slowly
Americas Sell List deteriorating and could continue to do so for an extended period of time. On the call, LMT management
Coverage view Cautious continuously referred to this period as a short-term challenge that would be followed by a reacceleration in
*Current and a year ago
growth. Our view is that Defense fundamentals have only just begun to roll over and that the history lesson
tells us that, once they do, it can be a long time before they bottom and improve again, given the slow and
bureaucratic nature of DoD spending/contracting.
Implications
3Q10 EPS of $1.55 compared to consensus of $1.53 and GS of $1.52 (but included a net-$0.09 benefit vs.
GS from lower VESP + higher Other - removal of EIG). Backlog declined qoq for the seventh consecutive
quarter, with book-to-bill at 0.80 (0.88 TTM). Cash was a clear bright spot with FCF/NI of 2.5X (ex the
pension contribution). 2010 EPS guidance was reduced to $6.75-6.95 (below consensus of $7.05) from
$7.15-7.35, but due to the EIG divestiture and not to operations. 2011 directional commentary of low-single-
digit revenue growth, flat segment operating profit, and $1.2 bn of FAS/CAS expense implies about 15%
downside to consensus. We lower our 2011/2012E to $6.35/$7.80 from $6.50/$7.95 largely on FAS/CAS,
and our 12- month price target to $63 from $65, given lower estimates.
Valuation
Our 12-month target price of $63 is based on our target relative P/E multiple methodology for Defense
companies.
Key risks
(1) capital deployment, (2) geopolitics, and (3) defense spending priorities.
Crown Holding, Inc. (CCK): Solid 3Q results; Buy on accelerating volume growth, strong FCF 27
CCK, $30.62 Richard Skidmore, CFA (New York): richard.skidmore@gs.com, (212) 357-5509
Market cap $4,967 mn
Goldman Sachs & Co.
Alex Ovshey (New York): alex.ovshey@gs.com, (212) 902-6751
Target price $36.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Usha Chundru (Bangalore): usha.chundru@gs.com, (212) 934-5057
EPS ($) 2.25 2.80 Goldman Sachs India SPL
P/E 13.6X 10.9X
EPS Quarter/Interim* 0.43 0.27
What's changed
Crown (CCK) reported 3Q2010 EPS of $0.85 (ex. items), slightly below our $0.86 estimate but better than
Investment Lists consensus of $0.83. Stronger-than-expected EBIT margins were offset by higher interest expense and tax
Americas Buy List rate vs. our estimate. CCK reported global beverage can volume growth accelerated to 11% yoy in 3Q2010,
Coverage view Neutral up from 4.5% and 8% yoy growth in 1Q and 2Q2010, respectively, primarily owing to greater ramp up of new
capacity in the emerging markets, and solid volume gains in N.A. and Europe. CCK raised its 2010 free cash
*Current and a year ago
flow (FCF) outlook to at least $425 mn (was $400 mn). CCK repurchased $105 mn of stock in 3Q, reducing
the share count by 2%.
Implications
We trim our 2010 EPS estimate to $2.25 from $2.28 to reflect 3Q2010 and slightly higher 4Q interest
expense. Our 2011 and 2012 EPS estimates of $2.80 and $3.25 are unchanged, respectively. We reiterate
our Buy rating on CCK, as (1) we see 24% yoy EPS growth in 2011 driven by robust global beverage can
volume growth, lower share count, and favorable FX; our 2011 EPS forecast is 12% above consensus, (2)
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
FCF generation is strong, and (3) valuation is compelling. We like CCK, as it is well positioned to increase its
return of cash to shareholders (via stock buybacks), given its strong FCF profile, low leverage, and favorable
debt maturity schedule.
Valuation
We see 18% upside to our new $36, 12-month, DCF-based price target (was $33). We raise our price target
as we roll forward our 10-year DCF model by one year to reflect forecasted net debt levels at the end of
4Q2011 vs. 4Q2010 previously. CCK trades at 10.9X 2011E EPS, a discount to its peer average of 11.3X
and its five-year average forward P/E of 14.2X despite a stronger EPS growth profile.
Key risks
Weaker global beverage can volume growth, less supply discipline in beverage and food cans, higher share
count due to less share buyback.
Technology
Juniper Networks, Inc. (JNPR): Buy on the pullback: Street EPS going up on strong secular growth 28
JNPR, $30.54 Simona Jankowski, CFA (San Francisco): simona.jankowski@gs.com, (415) 249-7467
Market cap $16,459 mn
Goldman Sachs & Co.
Kent Schofield (San Francisco): kent.schofield@gs.com, (415) 249-7489
Target price $32.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Erin Riley (San Francisco): erin.riley@gs.com, (415) 249-7453
EPS ($) 1.00 1.36 Goldman Sachs & Co.
P/E 30.5X 22.5X
EPS Quarter/Interim* 0.31 0.27
What's changed
Juniper reported F3Q (Sep.) revenue/non-GAAP EPS at $1,012mn/$0.32 vs. GS at $1,038mn/$0.32 and the
Investment Lists Street at $1,024 mn/$0.32. It guided for 4Q sales of $1,120 +/- $20mn, above GS/Street at
Americas Buy List $1,114mn/$1,101mn, and EPS of $0.35-0.37 (including $0.01 in incremental opex from recent M&A that was
Americas Conviction Buy List not modeled by us or consensus), vs. GS/Street at $0.38/$0.35.
Coverage view Neutral Implications
*Current and a year ago We see this week’s pullback as a particular buying opportunity and reiterate our CL-Buy on the stock. We
think this 3Q will differentiate true secular growers from those that have merely benefited from the cyclical
snap-back of the last five quarters, and Juniper stands out by guiding ahead of consensus where others
(e.g., Infinera) have stumbled. While sales in the quarter were a touch light on some federal push-outs into
4Q, MX3D supply constraints, and softness in Europe, all the forward-looking underlying business metrics
were strong: (1) book-to-bill ratio well above 1.0, (2) product backlog up 25% qoq, (3) deferred revenue up
2% qoq in the seasonally slow quarter (five-year average of 1%). There is no change to our above-
consensus non-GAAP estimates, with our FY11 EPS suggesting about 10% upside to Street estimates.
Valuation
There is no change to our 12-month price target of $32 based on a 27X P/E multiple on our normalized EPS
estimate of $1.20, implying 19X our CY11 non-GAAP EPS estimate of $1.65.
Key risks
Risks include greater pricing pressure, slower-than-expected service provider routing growth, and higher-
than-expected opex.
Impact on related securities
The federal push-outs may have also affected F5 and Riverbed, whose 3Q09 exposure to the government
vertical was 29% and 15%, respectively.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Yahoo! Inc. (YHOO): First Take: Heavy buybacks, light 4Q2010 net revenue guide 29
YHOO, $15.93 James Mitchell, CFA (New York): james.mitchell@gs.com, (212) 357-1849
Market cap $22,140 mn
Goldman Sachs & Co.
Ingrid Chung (New York): ingrid.chung@gs.com, (212) 902-2360
Target price $17.50
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Jordan Monahan (New York): jordan.monahan@gs.com, (212) 902-1879
EPS ($) 0.92 1.10 Goldman Sachs & Co.
Fred Krom (New York): fred.krom@gs.com, (212) 902-8618
P/E 17.4X 14.5X
Goldman Sachs & Co.
*
EPS Quarter/Interim 0.24 0.16
Investment Lists
News
Neutral Yahoo!’s 3Q gross revenue was in line with our estimate, up 2% yoy but 1% below the mid point of guidance.
Coverage view Attractive Owned and operated (O&O) search revenue was down 7% yoy/flat qoq versus our -6% yoy/+1% qoq
estimate, with yoy declines improving only 100 bp from last quarter against a 400 bp easier comparison.
*Current and a year ago
O&O display revenue decelerated fractionally to +17% yoy from +19% in 2Q on a 600 bp tougher comp and
was -1% qoq. TAC as a proportion of gross revenue increased 160 bp yoy to 29.8%. EBITDA of $408 mn
was 1% below our estimate. G&A was 3% above our estimate, while sales & marketing were 3% below our
estimates, and operating income of $276 mn was 5% above the mid-point of guidance but 4% below our
estimate due to depreciation and a $6 mn restructuring charge. Free cash flow of $250 mn was below our
$353 mn forecast on weaker operating cash flow and capex of $164 mn compared with our $149 mn
forecast. Yahoo! repurchased $868 million of stock (62.5 mn shares) in the quarter, 4% of shares
outstanding. Headcount was flat qoq at 14,100.
Analysis
(1) Page views were down 4%, in-line with the decline last quarter.
(2) Revenue guidance was below our forecasts. At the midpoint, the company guided for 4Q2010 net
revenue (ex-TAC) of $1.18 bn, 3% below our estimate and 7% below consensus. It guided for 4Q2010 GAAP
revenue of $1.465 bn, below our $1.688 bn estimate mostly because Yahoo! will now exclude TAC of $210
mn from its GAAP revenue. It guided for GAAP operating income of $200-$280 mn, versus our $263 mn
estimate. We view guidance as potentially conservative given upside to RPS from the Microsoft alliance.
Implications
Our rating and price target remain unchanged; we await further details on Yahoo!’s earnings call this
evening.
Solera Holdings, Inc. (SLH): Raising estimates on FX; positive takeaways from mgmt meetings 30
SLH, $43.85 Vincent Lin (New York): vincent.lin@gs.com, (212) 934-0510
Market cap $2,938 mn
Goldman Sachs & Co.
Julio C. Quinteros Jr. (San Francisco): julio.quinteros@gs.com, (415) 249-7464
Target price $46.00
Goldman Sachs & Co.
Fiscal y/e Jun 2011E 2012E Snigdha Sharma (Bangalore): snigdha.sharma@gs.com, (212) 934-5056
EPS ($) 1.55 1.85 Goldman Sachs India SPL
Dennis Sevilla (San Francisco): dennis.sevilla@gs.com, (415) 249-7434
P/E 28.2X 23.7X
Goldman Sachs & Co.
EPS Quarter/Interim* 0.35 0.33
Investment Lists
What's changed
Neutral We raise our estimates on higher revenues and margins driven by updated FX assumptions, following the
Coverage view Neutral recent weakening of the USD, most notably against the Euro (+7% last 3 months; 45% of SLH’s revenue).
Our FY11/FY12/FY13 EPS are now $1.55/$1.85/$2.13 from $1.47/$1.74/$1.99 prior; excluding stock comp
*Current and a year ago
and intangibles, our adjusted EPS are now $2.25/$2.49/$2.73. Reflecting our revised estimates, we are
raising our 12-month price target to $46 (from $43), suggesting 5% upside. We also recently hosted meetings
with SLH’s management and provide the key takeaways in this report.
Implications
We remain positive on SLH’s global positioning in the auto insurance claims industry and high margin
leverage. While execution is key, we see the company’s long-term revenue target of $1 bn (12% CAGR) and
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
EBITDA target of $400-$450 mn (11%-14% CAGR) by FY14 as achievable, supported by (1) an improving
global macro backdrop, (2) the secular adoption of automated services and sustained claims growth in its
evolving/emerging markets, (3) expanding revenue opportunities through introduction of new services and
targeted M&A, and (4) further EBITDA margin expansion of 100-150 bp annually. We maintain our Neutral
rating on valuation, with the shares trading at 18X our CY11 adjusted EPS vs. estimated long-term EPS
growth of 15%. Near term, we view sustained improvement in organic growth as key in driving share
performance.
Valuation
Our 12-month price target of $46 is based on a weighted average model incorporating a sector-relative
investment framework, CY11 P/E, and EV/EBITDA multiples; it implies a CY11 P/E of 19X our adjusted EPS.
Key risks
Downside: Lower volume growth, slower service adoption, and FX volatility. Upside: Higher revenue growth
and/or margins.
Altera Corp. (ALTR): Significant downside to 2011 Street estimates, prefer ALTR to XLNX 31
ALTR, $29.50 James Schneider, Ph.D. (New York): james.schneider@gs.com, (917) 343-3149
Market cap $9,354 mn
Goldman Sachs & Co.
James Covello (New York): james.covello@gs.com, (212) 902-1918
Target price $26.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Gabriela Borges (New York): gabriela.borges@gs.com, (917) 343-0368
EPS ($) 2.46 2.10 Goldman Sachs & Co.
P/E 12.0X 14.1X
EPS Quarter/Interim* 0.68 0.34
What's changed
Altera reported 3Q sales of $527 mn (+12% qoq), in line with GS at $531 mn and the Street at $526 mn and
Investment Lists at the midpoint of revised guidance of +10% to +14% qoq. Operating EPS of $0.69 was ahead of GS at
Neutral $0.68 and the Street at $0.65 on lower opex and taxes partly offset by a lower gross margin. The telecom &
Coverage view Attractive wireless segment delivered the strongest growth, up 21% qoq. 4Q guidance is for sales to be up 3% to 6%
qoq ($543 mn-$559 mn), with turns in the mid 20% range. The midpoint of $551 mn is well above our prior
*Current and a year ago
$508 mn and the Street at $512 mn, with a gross margin of 70%-71%, R&D of $65 mn-$66 mn, and SG&A of
$61 mn-$62 mn. For 4Q, Altera expects telecom to be up (driven by wireless) with networking/ computing up
and industrial/military/auto and Other flat to slightly down.
Implications
Despite Altera’s best-in-class execution, we see significant downside to Street estimates for 2011 as (1)
comms revenue is running 25%-35% above normalized levels even after accounting for aggressive PLD
content gains, (2) carrier capex is expected to be down 5% in 2011, with negative seasonality in 1H2011. We
are thus cautious on the stock but prefer it to Xilinx (Sell, $26.34) as Altera continues to execute better than
Xilinx and has more favorable end-market exposure. Within the comms vertical, we prefer names such as
PMC-Sierra (where we think Street estimates already reflect an inventory correction at comms OEM
customers), or those with exposure to multiple secular growth themes such as Broadcom (smartphones,
mobile backhaul, tablets). Adjusting near-term estimates slightly on higher revenue: 2010 to $2.46 from
$2.40, 2011/2012 unchanged at $2.10/$2.15.
Valuation
Our six-month price target in unchanged at $26, and is based on a 15X multiple applied to our normalized
EPS estimate of $1.75.
Key risks
Risks include excess inventory and stronger-than-expected capex trends.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Telecom Services
NII Holdings (NIHD) Buy: Attractive entry point; upgrade to Buy, add to LatAm Focus List 32
NIHD, $36.60 Lucio G. Aldworth (Sao Paulo): lucio.aldworth@gs.com, +55(11)3371-0726
Market cap $6,266 mn
Goldman Sachs Brasil Bco Múlt S.A.
Andre Rezende (Sao Paulo): andre.rezende@gs.com, +55(11)3371-0766
Target price $47.90
Goldman Sachs Brasil Bco Múlt S.A.
Fiscal y/e Dec 2010E 2011E
EPS ($) 2.17 2.78 Source of opportunity
P/E 16.9X 13.2X We upgrade Nextel International (NIHD) to Buy from Neutral on weakness, as we now see 31% upside to our
* unchanged 12-month price target of $47.90. NIHD and Televisa announced on October 18 the termination of
EPS Quarter/Interim 0.69 0.70
their JV for 3G mobile in Mexico. Since press reports suggested last week the JV might be cancelled, NIHD
Investment Lists shares are down 15% (vs. S&P 500 -1%). Without a cash injection from Televisa, we believe NIHD still has
Americas Buy List the resources to deploy wireless data in Mexico and thus capture 100% of this growth. We also add NIHD to
Coverage view Cautious
our LatAm Focus List, replacing Brazilian mobile operator Vivo (VIVO4.SA).
Catalyst
*Current and a year ago
NIHD is scheduled to report 3Q on October 28 – we see 23% yoy revenue growth and EBITDA up 20% from
3Q2009. At 5.0X 2011E EV/EBITDA, we believe EBITDA growth alone should carry the stock to close to our
target price, even if the multiple remains stable. NIHD is up 17% since its Feb. low, in line with the improving
equity-market conditions (S&P 500 +9%) and favorable FX (LatAm currencies +7%), so that growth and the
fact that it now owns much-needed spectrum do not seem to be priced in. Lastly, NIHD’s low leverage (net
debt/EBITDA of 0.9X in 2Q10) and strong EBITDA should make it self-sufficient for the roll-out of 3G in
Mexico and Brazil.
Valuation
Our 12-month EV/EBITDA-based target price remains unchanged at $47.90, as do our estimates, since we
had not incorporated the proposed deal in our model. At current levels, NIHD trades at a 6% discount to
emerging-market wireless peers on a 2011E EV/EBITDA basis, despite growing twice as fast – NIHD’s
multiple is now 21% below its three-year average.
Key risks
Major risks involve the legal dispute over license in Mexico, competition in Brazil’s upcoming spectrum
auction, economic environment and FX rates.
Latin America: Telecom Services: Positioning for 3Q10: 3G driving mobile growth; fixed-line/integrated 33
struggling
Lucio G. Aldworth (Sao Paulo): lucio.aldworth@gs.com, +55(11)3371-0726
Goldman Sachs Brasil Bco Múlt S.A.
Andre Rezende (Sao Paulo): andre.rezende@gs.com, +55(11)3371-0766
Goldman Sachs Brasil Bco Múlt S.A.
Data continues driving mobile growth
With 3G going mainstream in LatAm, data-related services are quickly becoming mobile operators’ biggest
growth contributor. On average, pure mobile operators Vivo and TIM should grow service revenues 10% yoy
in 3Q2010, with data contributing 7 pp of that. Last quarter, data was 17% of their service revenues and grew
at an average yoy pace of 47%. Vivo and TIM are fully exposed to the mobile market and to Brazil’s growth
potential on mobile data, given pent-up demand for broadband and insufficient fixed-line coverage.
AMX now integrated, not a pure mobile
LatAm’s largest wireless carrier, AMX, will start to consolidate figures with fixed-line carrier TMX and long-
distance/pay-TV operator TII in 3Q. We expect this to reduce reported growth rates by around 3 pp and
EBITDA margins by 3 pp, before synergies. AMX is up 14% since September 1 and trades at 6.1X 2011E
EV/EBITA, a 23% premium to an average of global telcos – we remain Neutral.
TIM: Strong net adds & improving margins
We expect TIM Brazil to report the best yoy EBITDA margin gain among wireless telcos we cover, up 220 bp
to 25.3% in 3Q. This is despite the expected record level of net adds (2.1 mn) in the quarter, which should
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
help it narrow the market-share gap to Claro. We maintain our Buy rating. Starting in 4Q, TIM should start
reporting in IFRS – this accounting change should add 200/300 bp to reported margins.
Vivo earnings up on lower depreciation
We also reiterate our Buy rating on Vivo, Brazil’s largest mobile operator. Vivo has concluded the accelerated
depreciation of its CDMA network, so that depreciation charges should drop 23% qoq. This, along with
recurring EBITDA growth of 10% yoy, should fuel 48% yoy earnings growth.
FX still pushing NIHD reported growth
Push-to-talk specialist NIHD should grow sales 23% yoy, after a 3pp push from FX. With EBITDA expected to
growth 20% yoy, and an 8% discount to emerging market telcos, we reiterate our Buy.
Transportation
LLX Logistica (LLXL3.SA): Focus now on the Açu Port; keep Neutral rating on LLX 34
LLXL3.SA, R$8.80 Eduardo Siffert Couto, CFA (Sao Paulo): eduardo.couto@gs.com, +55(11)3371-0764
Market cap R$6,095 mn
Goldman Sachs Brasil Bco Múlt S.A.
Tais Correa (Sao Paulo): tais.correa@gs.com, +55(11)3371-0833
Target price R$9.60
Goldman Sachs Brasil Bco Múlt S.A.
Fiscal y/e Dec 2010E 2011E
EPS (R$) (0.15) (0.40) What's changed
P/E -- -- We update estimates for 2Q2010, a stronger BRL and capex delays at the Açu Port with a small positive
impact on 2010/11/12E EPS. Our 12-month target price of R$9.60 (from R$9.50) still includes the Sudeste
EPS Quarter/Interim* (0.06) 0.00
Port as its sale to MMX needs shareholder approval (expected in November 2010).
Investment Lists
Implications
Neutral If approved by shareholders, the Sudeste Port will be sold to MMX for US$441 mn in cash (or MMX shares)
Coverage view Attractive plus a perpetual royalty bond that receives US$5/ton of future iron ore loaded in the Sudeste Port. Using our
unchanged DCF valuation of Açu, we calculate that LLX’s current price is implying a valuation for the royalty
*Current and a year ago
bonds of US$1.2 bn, equivalent to a 14% yield in real dollar terms. Factors affecting these bonds will include
(1) uncertainty over port volumes; (2) uncertain liquidity; and (3) possible restrictions for equity holders to
hold the bonds.
The Açu Port will be LLX’s only project after the Sudeste sale. In our view, the Açu Port is riskier, handling
different products with potential delays. The Açu Port is scheduled to start up in 2012 but the steelmakers
Ternium and Wisco are still studying the area, and timing for the mills is unclear. It is also uncertain whether
the OSX shipyard will use the Açu Port and talks with oil makers for blending units are preliminary. Anglo has
announced a two-year delay in the ore pipe, and rail access to Açu is still in discussion with transportation
authorities and railroad operators.
Valuation
We maintain our Neutral rating with 6% upside to our DCF-based 12-month price target. Excluding the
Sudeste Port, 74% of LLX’s value comes from the Açu industrial complex (22% area leasing, 16% steel, 8%
coal, 22% oil, 5% others) where project visibility is still low.
Key risks
Lower liquidity after the Sudeste sale and delays in the Açu Port are risks.
Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
Utilities
American Electric Power (AEP): Ohio a concern but warming up on valuation and dividend hike 35
AEP, $36.52 Michael Lapides (New York): michael.lapides@gs.com, (212) 357-6307
Market cap $17,457 mn
Goldman Sachs & Co.
Neil Mehta (New York): neil.mehta@gs.com, (212) 357-4042
Target price $39.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Jaideep Malik (New York): jaideep.malik@gs.com, (917) 343-0717
EPS ($) 3.05 3.17 Goldman Sachs & Co.
P/E 12.0X 11.5X
EPS Quarter/Interim
*
1.15 0.93
What's changed
After AEP’s 3Q reporting and analyst day, we update estimates to reflect assumptions for wholesale sales,
Investment Lists financings, dividend payouts, rate cases, and transmission growth. We update estimates for 2010/2011/2012
Neutral from $3.09/$3.13/$3.36 to $3.05/$3.17/$3.30 and 2013/2014 from $3.57/$3.73 to $3.48/$3.65. We maintain
Coverage view Neutral our $39, 12-month price target, implying 11% return including a 4-5% dividend yield.
*Current and a year ago
Implications
Although AEP continues to improve returns across multiple jurisdictions, the shares generally trade at a
discount to peers, likely on Ohio-related concerns, given the regulatory/rate-making process next year and
the excessive earnings test (SEET).
We emerge from the analyst day incrementally more positive on AEP, especially given a management-
recommended 9.5% dividend increase. Potential negative catalysts remain, with Ohio staff testimony on the
SEET coming later this week and hearings next week. We view the SEET process, potential turnover on the
Ohio utility commission after the November elections, and next year’s rate proceeding as key for AEP.
Valuation
Our $39, 12-month target price for AEP implies 11% total return – and incorporates a 0.75X-1.0X P/E
multiple discount for AEP versus other large-cap regulated utilities. AEP experienced an average discount of
1.3X-1.4X versus large-cap regulated utilities over the last 3 to 5 years. Removal or a decrease in uncertainty
in Ohio could lead to multiple expansion.
Key risks
Primary risks to our view and price target include a lower-than-expected recovery in power demand, rate
case and regulatory risks, and project approvals and siting for key transmission initiatives.
Reports Published
China: Portfolio Strategy: Surprise rate hike could trigger ST profit taking, but our
constructive view remains – buy on dips
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Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
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Goldman Sachs Global Investment Research
Americas Morning Summary October 20, 2010
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