US Year Ahead 2010: Signs of Growth

North America Equity Research
09 December 2009
US Year Ahead 2010

Signs of Growth
US Equity Strategy
AC
Thomas J Lee, CFA
(1-212) 622-6505
thomas.lee@jpmorgan.com
J.P. Morgan Securities Inc.
For a complete list of contributors

to this report, please see complete
table of contents on page 2.
Contents
Macro................................................................... 5
Capital Goods/Industrials .................................... 9
Consumer .......................................................... 17
Energy ............................................................... 31
Financials........................................................... 33
Health Care ....................................................... 41
Materials ............................................................ 51
Media & Telecom............................................... 57
Technology ........................................................ 63
See page 74 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Americas Equity Research US Year Ahead 2010
December 2009
Table of Contents
Macro
Economics (Bruce Kasman) .........................................................................................5
Equity Strategy (Tom Lee)............................................................................................7
Accounting & Valuation (Dane Mott) ............................................................................8
Capital Goods/Industrials
Aerospace & Defense (Joseph B. Nadol III) .................................................................9
Airfreight & Surface Transportation (Thomas R. Wadewitz) .......................................10
Electrical Equipment & Multi-Industry (C. Stephen Tusa, Jr.).....................................11
Engineering & Construction (Scott Levine).................................................................12
Environmental Services (Scott Levine).......................................................................13
Machinery (Ann Duignan)...........................................................................................14
Marine Transportation (Jonathan B Chappell)............................................................15
Consumer
Airlines (Jamie Baker) ................................................................................................17
Autos, Auto Parts, Tires, and Dealers (Himanshu Patel)............................................18
Beverages (John Faucher) .........................................................................................19
Building Materials (Mike Betts) ...................................................................................20
Gaming (Joseph Greff) ...............................................................................................21
Homebuilding & Building Products (Michael Rehaut) .................................................22
Household Products & Personal Care (John Faucher)...............................................23
Lodging (Joseph Greff)...............................................................................................24
Packaged Food (Terry Bivens)...................................................................................25
Restaurants (John Ivankoe) .......................................................................................26
Retailing – Broadlines & Department Stores (Charles Grom).....................................27
Retailing – Food (Charles Grom)................................................................................28
Retailing – Hardlines (Christopher Horvers) ...............................................................29
Tobacco (Erik Bloomquist) .........................................................................................30
Energy
Electric Utilities & Independent Power Producers (Andrew Smith).............................31
Oil & Gas Exploration & Production (Joseph Allman) .................................................32
2
December 2009
Financial
Banks – Large Cap (Vivek Juneja) .............................................................................33
Banks – Mid-Cap (Steven Alexopoulos) .....................................................................34
Brokers, Asset Managers & Exchanges (Kenneth B. Worthington)............................35
Insurance – Life (Jimmy Bhullar) ................................................................................36
Insurance – Non-Life (Mathew Heimermann).............................................................37
REITs/Real Estate Services (Michael W. Mueller / Anthony Paolone) .......................38
Specialty & Consumer Finance (Andrew Wessel) ......................................................39
Health Care
Biotechnology (Geoffrey Meacham) ...........................................................................41
SMid Biotechnology (Cory Kasimov) ..........................................................................42
Healthcare Facilities (John Rex).................................................................................43
Healthcare Technology & Distribution (Lisa Gill) ........................................................44
Managed Care (John Rex) .........................................................................................45
Medical Technology & Devices (Michael Weinstein) ..................................................46
SMid Cap Medical & Life Science Technology (Tycho W. Peterson) .........................47
Pharmaceuticals – Major (Chris Schott) .....................................................................48
Pharmaceuticals – Specialty (Chris Schott)................................................................49
Materials
Base Metals & Steel (Michael F. Gambardella)..........................................................51
Coal (John Bridges)....................................................................................................52
Chemicals (Jeffrey J. Zekauskas) ..............................................................................53
Gold & Precious Metals (John Bridges)......................................................................54
Paper & Packaging (Claudia Shank Hueston)............................................................55
Media & Telecommunications
Advertising & Publishing (Alexia Quadrani) ................................................................57
Entertainment (Imran Khan) .......................................................................................58
Information Services/TV & Radio Broadcasting (Michael Meltz).................................59
Internet (Imran Khan) .................................................................................................60
Telecom Services (Michael McCormack) ...................................................................61
3
December 2009
Technology
Applied Technologies (Paul Coster) ...........................................................................63
Business Services (Andrew Steinerman) ...................................................................64
Communications Equipment (Rod Hall) .....................................................................65
Communications Infrastructure Technology (Steven O’Brien)....................................66
Computer Services & IT Consulting (Tien-tsin Huang) ...............................................67
Education Services (Andrew Steinerman) ..................................................................68
IT Hardware & Imaging (Mark Moskowitz)..................................................................69
Semiconductors (Christopher Danely)........................................................................70
Software (John DiFucci) .............................................................................................71
Software Technology (Sterling Auty) ..........................................................................72
Disclosures.................................................................................................................74
All stock prices and coverage lists in this report are as of the close,
December 1, 2009, unless otherwise noted.
4
December 2009
US Economic Outlook
Macro
3.5% Growth Never Felt So Bad
Bruce Kasman AC • The forecast looks for a real recovery, with 3.5% real GDP growth through
(1-212) 834-5515 2011.
bruce.c.kasman@jpmorgan.com
David Hensley • Even with the forecasted growth, the economy will be plagued by very high
(1-212) 834-5516 unemployment, large fiscal deficits, and excess capacity.
david.hensley@jpmorgan.com
• Core inflation is expected to decline further and average well under 1% over
Joseph Lupton
2010 and 2011.
(1-212) 834-5735
joseph.p.lupton@jpmorgan.com
• Fed rates are probably on hold until 1H11, but the Fed will be shifting away
J.P. Morgan Securities Inc. from unconventional policy in 2010.
Lifted by enormous policy supports, the longest and deepest economic downturn
since the 1930s appears to have ended. Last quarter saw real GDP growth rise at
about a 3% annualized rate and it seems likely that the economy will post another
solid increase this quarter. However, growth has yet to produce a shift in private
sector behavior sufficient to generate the job gains that will be necessary for a self-
sustaining expansion.
J.P. Morgan’s central view is that this shift in the private sector will take hold in the
coming months as the business sector responds to this year’s surge in profitability,
improvement in financial market conditions, and synchronized global growth.
Importantly, a modest change in business behavior from depressed levels of activity
can produce sustained above-trend growth. Thus, our forecast of a gradual but broad-
based move to an end of the destocking cycle (in manufacturing, retail, and
construction) alongside an alignment of investment spending to levels of depreciation
and hours to growth in demand will be sufficient to generate J.P. Morgan’s forecast
of average GDP growth of 3.5% in the coming quarters.
Viewed from a historical perspective, this outcome should be seen as disappointing
as the economy has tended to generate sustained growth of 5% to 7% in the
aftermath of a deep economic downturn. Tempering the powerful forces that have
tended to lift the economy from its depths are three meaningful drags: credit market
tightness, which is expected to limit the recovery in investment and consumer
durable spending; the lasting damage to household balance sheets and job security,
which is expected to promote further increases in household saving; and an unusually
large drag on growth from state and local spending.
If we are correct, the economic landscape will be marked by an unprecedented
tension between persistent elevated growth and depressed levels of activity over the
coming quarters. In particular, we expect to see:
• Strong profits and elevated margins. Tight corporate cost control combined
with what is now an expanding economy is by all accounts generating
impressive increases in profits and cash flow. The weaker dollar is giving a
special boost to activity and pricing power in trade-sensitive industries. By the
beginning of 2010 business margins will have risen above historical norms and
earnings are set to continue to grow solidly in 2010 even as business turns less
cautious.
• Unemployment above 9% two years into expansion. Following the deepest

downturn since the 1930s, 3.5% growth will not be sufficient to lift operating
rates meaningfully, in our view. By the end of 2011, the U.S. unemployment rate
5
December 2009
is expected to approach 9%, a level roughly four percentage points above the
average during the past expansion.
• Core inflation falling below 1%. Core inflation is already low and set to be
pushed lower by the supply/demand imbalances created by the recession. High
rental vacancy rates are producing a sharp slowing in rents, while high
unemployment rates for labor have brought a remarkably sharp slowing in
hourly labor costs. We anticipate core inflation to slide below 1% next year—a
historic low.
• The Fed on hold for all of 2010. With unemployment expected to remain above
10% for some time and core inflation falling, it is unlikely that the FOMC will
move policy rates higher next year. Actions to reduce the size of reserves may be
taken if financial conditions improve but rate hikes are not anticipated until
1H 2011.
• Budget deficit persisting above $1 trillion. We anticipate public sector deficits

to remain very high even as the stimulus plan unwinds. Elevated levels of
unemployment are likely to deliver a new set of fiscal initiatives—amounting to
roughly 1% of GDP—contributing to an anticipated 8% of GDP budget deficit
in 2011.
We recognize that the political pressures arising from the extremes incorporated in
the economic outlook—high unemployment, elevated profit margins, and bulging
public sector debt—are set to build and policy actions are a major wild card to the
forecast. The main risk is that actions taken to alleviate these problems—through
greater social insurance and higher taxes on corporates and upper-income
households—reduce incentives to hire and medium-term growth prospects.
6
December 2009
US Equity Strategy
Strong 1H10, Followed by Policy Risks in 2H
Thomas J Lee AC The outlook for U.S. equities in 2010 is positive, reflecting both a broadening of the
(1-212) 622-6505 U.S. economic recovery as well as the Fed on hold for a sustained period of time
thomas.lee@jpmorgan.com (sustaining expanded liquidity and, thus, extending the asset reflation trade).
Bhupinder Singh
(1-212) 622-6406 This is close to the “goldilocks” scenario for equities, as expressed by many PMs, of
bhupinder.b.singh@jpmorgan.com a slow, U-shaped, jobless GDP recovery that should keep the Fed accommodative for
Daniel M McElligott a prolonged period of time. Thus, equities are likely to gain in attractiveness relative
(1-212) 622-5598 to credit, given their inherent greater leverage to GDP growth. With price levels for
daniel.m.mcelligott@jpmorgan.com many fixed income markets matching their pre-recession levels, potential total return
J.P. Morgan Securities Inc. is less attractive (compared to equities) while the low volatility gains for credit in
2009 are unlikely to be seen again (read as higher variability). Equity volatility
(VIX), by contrast, has been steadily declining, a likely precursor to greater inflows
from money market funds.
But there is also a case to be made that the U.S. recovery could be more vigorous,
posing upside risk to our EPS estimates. The anticipated recovery in labor markets in
early 2010 (as early as January) marks an important pivot point for equities, in our
view. Corporate, household, and investor confidence in a sustained recovery hinges
on expanding payrolls. The rapid 20% improvement in claims since the end of
recession is more similar to the 1973-75 and 1982-83 recoveries, both of which saw
greater jobs gains.
Investors are still too pessimistic about the U.S. profit outlook
The deep pessimism born out of the recession has resulted in overly conservative
forecasts for S&P 500 profits, in our view. We estimate S&P 500 profits of $80 in
2010, with profits likely to approach prior peak by 2011 (2007 LTM peak was
$92.15). The S&P 500 is currently trading at 13.7x 2010E EPS.
In this environment, our general 1H themes are as follows:
• We favor Pro-Cyclical groups, but higher-quality.

• With 15%-plus upside potential for equities in 1H10, we favor higher-Beta.
• With strong balance sheets, low financing costs, underinvestment, and anticipated
slower growth, 2010 should be a strong year for M&A.
• Street is likely to make major positive revisions to EPS estimates. We believe as
many as 50% of S&P 500 companies will exceed their prior peak EPS (set in
2007/2008) and by 2011, 85%.
2H10 likely to be more challenging as investors reduce the risk trade…
Bruce Kasman’s GDP growth forecast of 3.5% is 100 bps above Consensus,
although he believes the Fed will be on hold for all of 2010, much longer than
Consensus. Kasman argues that with unemployment expected to remain above 10%
for some time and core inflation falling, it is unlikely that the FOMC will move
policy rates higher next year, and if GDP growth surprises and thus financial
conditions improve faster, the Fed simply can reduce the size of reserves. Still, it
would be natural for risk markets to anticipate policy normalization in 2010, even if
the Fed is on hold well into 2011. Thus, as we move into 2H10, the risks for
widening spreads could become a headwind for equity valuations. To us, this
strongly suggests that best performance for stocks will be in 1H10, with perhaps
little gain thereafter.
7
December 2009
Accounting & Valuation

Convergence Will Take Center Stage
Accounting & Valuation – US

In August 2008, the U.S. Securities and Exchange Commission (SEC) proposed a
AC
roadmap that created a preliminary path for potential mandatory adoption of
Dane Mott, CFA, CPA
International Financial Reporting Standards (IFRS) as issued by the International
(1-415) 315-5905
dane.mott@jpmorgan.com
Accounting Standards Board (IASB). The roadmap suggested that the SEC would
make a final decision regarding adoption of IFRS in 2011. Since that preliminary
roadmap was released, SEC chairpersons have changed and a number of decisions
have been made by both the IASB and the Financial Accounting Standards Board
Accounting & Valuation –
(FASB) that may complicate the SEC’s decision as to whether it is appropriate for
Europe the U.S. to abandon U.S. GAAP as issued by the FASB at this time. The SEC is
Sarah Deans
expected to give more color on its current position regarding conversion to IFRS by
(44-20) 7325-1775 year-end 2009.
sarah.deans@jpmorgan.com
Closely related to the convergence issue is the accounting for financial institutions.
J.P. Morgan Securities Ltd.
Accounting for financial institutions has become a contentious issue given the global
financial crisis. Two controversial standards at the heart of the crisis, FAS 140 and
FIN 46(R), recently have been amended and replaced by FAS No. 166, Accounting
for Transfers of Financial Assets, an Amendment of FAS No. 140 (FAS 166) and
FAS No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). Both FAS
166 and 167 are effective for fiscal years beginning after November 15, 2009.
The implication of these changes is that a substantial amount of off-balance sheet
structures will be consolidated onto balance sheets of financial institutions and other
entities such as manufacturers that have become users of off-balance sheet structures.
Securitizations are often housed in special purpose entities (SPEs). SPE structures are
attractive because they are bankruptcy-remote.
One favorite mechanism in the current accounting framework for structuring off-
balance sheet treatment is the QSPE that was created under FAS 140. If an entity
satisfied the QSPE requirements under FAS 140, it did not have to test the entity for
consolidation. FAS 166 eliminates the QSPE concept; thus, all potential off-balance
sheet entities will have to at least be tested for consolidation under FAS 167. Under
FAS 167, a company will be considered a primary beneficiary of the entity and be
required to consolidate it if it has both:
• The power to direct the activities of the entity that most impact its economic
performance; and
• The obligation to absorb losses and the right to receive benefits that
potentially could be significant to the VIE.
VIEs will need to be continuously tested for consolidation. Further, while in the past
quantitative testing was generally used to make the primary beneficiary
determination, FAS 167 will require that qualitative testing be the primary method of
making that decision, which could make it harder for companies to create structures
intended to benefit from off-balance sheet treatment.
It is also very important to note that during 2010, both the IASB and FASB are
committed to producing complete sets of new rules on accounting for financial
instruments. This will be an important test of the effort to converge IFRS and U.S.
GAAP, prior to the proposed potential U.S. adoption of IFRS. Currently there are
substantial differences between the IASB and FASB approaches. For more on these
issues, see our August 12, 2009 Accounting Issues, “An Updated Q&A to Financial
Instrument Accounting After the Credit Crunch.”
8
December 2009
Aerospace & Defense
Capital Goods/Industrials
Bottoming of Commercial Aftermarket Should Be Industry Bright Spot in 2010
Joseph B. Nadol AC The three major drivers of commercial aero stocks should be a bottoming of
(1-212) 622-6548 aftermarket sales and earnings, a further unfolding of the profile of the cycle, and
joseph.nadol@jpmorgan.com progress on the 787 development program. The aftermarket should see the most
Seth M. Seifman, CFA immediate benefits from the recovery J.P. Morgan’s economics team is forecasting,
(1-212) 622-5597 but the cycle has a significant lag to it and the 787 is an independent factor.
seth.m.seifman@jpmorgan.com
Rica D Mendoza Airline traffic declines have stabilized, and weak comps combined with global
(1-212) 622-8113 economic expansion should result in some traffic growth in 2010, which should
rica.d.mendoza@jpmorgan.com benefit aftermarket sales. While aftermarket sales could be up mid-single digits,
J.P. Morgan Securities Inc. growth should be weighted to the back half, with destocking remaining an issue near
term. OE production is very late-cycle, and while this downturn should be shallow by
historical standards, we still expect Boeing and Airbus to announce further rate cuts
Alliant Techsystems Inc. (ATK) ....................N this coming year, which should take effect in late 2010/2011. In addition, with order
Boeing Company (BA)..................................N books already full and airlines continuing to struggle with yields, we do not expect a
Bombardier (BBDb.TO) ................................N material bounce in new orders. The most important issue affecting Boeing is the 787
CACI International Inc (CACI) ......................N
development program, and this is independent of economic trends. While Boeing
Comtech Telecommunications (CMTL)....OW
Embraer SA (ERJ) ........................................N
could fly the aircraft for the first time before its year-end deadline, we see another
General Dynamics Corp. (GD) .....................N delay prior to first delivery—now scheduled for 4Q10—as increasingly likely.
Goodrich (GR) ..............................................N Stocks with more aftermarket exposure could outperform as the 2011/2012 earnings
Harris Corporation (HRS) .............................N picture comes into greater focus.
L-3 Communications (LLL) ...........................N
Lockheed Martin (LMT).............................OW Defense fundamentals remain challenging, and we expect investment spending to be
Northrop Grumman (NOC) ...........................N flat in FY10 and decline by mid-single-digit percentage levels annually for 2-3 years
Precision Castparts (PCP)........................OW
thereafter. Lower Iraq spending is a key driver of the budget outlook, and we do not
Raytheon (RTN)........................................OW
Rockwell Collins (COL).............................OW expect additional troops for Afghanistan to change the negative overall trend. We
SAIC (SAI) ................................................ UW expect the challenging fiscal outlook and a new emphasis on deficit reduction by the
Spirit AeroSystems (SPR) ............................N administration to pressure defense investment spending. We believe the market has
United Technologies (UTX) ......................OW largely discounted weak defense fundamentals in the stocks of the defense primes.
Barring further surprise cuts, we see the stocks as attractively valued but bereft of
any visible catalysts, which means that longer-run return potential is strong but they
could lag until the geopolitical, political, and/or fiscal pictures somehow change.
Best Idea
Rockwell Collins (COL) is the only company in our universe for which we consider
2010 EPS expectations to incorporate truly cyclically depressed commercial
aerospace earnings. COL should post above-average sales growth out of the
downturn, and market share gains in recent years should provide support. High
operating leverage, including incremental margins that have typically run 45-50% in
Commercial, should boost the bottom line. FY10 EPS should be the trough this
cycle, and after some further headwinds are burned off in FY11, we see ~20% annual
EPS growth potential for a multi-year period. We are modeling almost no
contribution to EPS growth from Government Systems in the coming years due
largely to budget headwinds, and any upside could drive EPS higher. We see
potential for multiple expansion into the mid/high-teens once the commercial aero
trough has been firmly established.
Rockwell Collins (COL) – Overweight – Dec 10 Price Target: $64.00

Price 52-wk range FY EPS P/E Mkt Cap
12/01/2009 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
$54.43 $55.04 $27.67 Sep-10 $3.73 $3.45 $3.80 15.78 14.32 $8,558
9
December 2009
Airfreight & Surface Transportation

Favor Asset-Based Transports with Strong Operating Leverage in 2010; UPS Is Our Top Pick
Thomas R. Wadewitz AC Looking to 2010, we continue to favor asset-based transports with substantial
(1-212) 622-6461 operating leverage over the non-asset-based transports with greater variable costs.
thomas.r.wadewitz@jpmorgan.com Consistent with the J.P. Morgan Economics team’s forecast of 3.5% GDP growth
Michael R. Weinz, CFA and 4.5% Industrial Production – Manufacturing growth, we expect a transition to
(1-212) 622-6383 y/y growth in transport volumes in 2010. With very easy comparisons, we believe
michael.r.weinz@jpmorgan.com that there is room for upside surprise in terms of rail, truck, and parcel volume
Alexander K. Johnson growth in 1H10. In general, the transports have realized strong cost-side performance
(1-212) 622-6513 in 2009, and we believe that most of the asset-based names are likely to show
alexander.k.johnson@jpmorgan.com
substantial operating leverage and margin expansion when volumes improve.
Lower pricing, which resulted from a highly competitive bid season in 1H09, will
Arkansas Best (ABFS).............................. UW still likely have a negative effect on realized pricing in the truckload, intermodal, and
Burlington Northern Santa Fe (BNI) .............N LTL segments in 1H10, which will exert a headwind on EPS. Although pricing gains
C.H. Robinson Worldwide (CHRW)..............N
are likely to decelerate in 2010 compared to the pace in 2009, we still expect the
Canadian National Railway (CNI).............OW
Canadian Pacific Railway (CP).....................N railroads to realize the best pricing performance of the transport segments in 2010.
Con-way (CNW)........................................OW Pricing is likely to be only a modest drag in 1H10 for the parcel companies due to
CSX (CSX)................................................OW business locked in during 2009. If the favorable transport volume growth scenario
Expeditors (EXPD)........................................N does play out, we expect the parcel names (UPS, FDX) to show the best operating
FedEx Corp (FDX) ....................................OW leverage of the large transports, with the railroads realizing more modest leverage,
Genesee & Wyoming (GWR) .......................N
Heartland Express (HTLD) ...........................N
but still-attractive EPS growth. Given our sense that pricing will take a few quarters
J.B. Hunt Transport Services, Inc. (JBHT)....OW to turn for the truckload group, we believe that rising utilization (miles/tractor) is the
Knight Transportation, Inc. (KNX) ............OW more likely catalyst for EPS performance and the stocks in the truckload group. We
Landstar (LSTR) .......................................OW have generally favorable views on the railroad, parcel, and truckload stocks.
Norfolk Southern (NSC)................................N
Old Dominion (ODFL)...................................N Due to persistent uncertainty regarding the fate of large LTL carrier YRC
Pacer International (PACR) ...................... UW Worldwide, we are cautious on the LTL group where the pricing structure has
RailAmerica (RA) ......................................OW incurred significant damage. Lacking visibility to either the survival or demise of
Union Pacific (UNP)..................................OW
United Parcel Service (UPS) ....................OW
YRC, we suspect that it will be tempting for one or more of the large LTL
UTi Worldwide (UTIW)..................................N competitors to maintain downward pressure on pricing, which in turn will weigh
Werner Enterprises (WERN) ....................OW heavily on a recovery in earnings. We are also generally cautious on the asset-light
YRC Worldwide (YRCW)..............................N transport intermediaries including freight forwarders and truck brokers. Even as top-
line growth returns, we don’t expect attractive EPS performance from these names
because tighter capacity is likely to compress their yields/gross margins. We believe
it could make more sense to own some of these high-quality transport intermediaries
after a few quarters of yield compression have occurred.
Best Idea
Our best idea in 2010 is UPS which has significant operating leverage, and it is a
stock that has generally been out of favor. While it may take a few quarters for UPS
to realize meaningful positive pricing, we believe that weight per piece will likely
rise in conjunction with growth in the economy. This creates a similar effect to rising
base rates. We also note that the significant labor inflation headwind in 2009 driven
by reduced hours from low-cost workers (due to the impact of union contracts)
should work in the other direction, causing low effective wage inflation in 2010. We
expect significant EPS growth and upside for the stock in 2010.
United Parcel Service (UPS) – Overweight – Dec 10 Price Target: $72.00

$57.88 $59.63 $37.99 Dec-09 $3.50 $2.19 $2.75 26.43 21.05 $57,464
10
December 2009
Electrical Equipment & Multi-Industry

Still Cautious on Fundamentals, GE Remains Our Top Pick
C. Stephen Tusa, Jr., CFA AC We remain cautious on our outlook for the Multi-Industry sector in 2010, based on
(1-212) 622-6623 our view that fundamentals in this generally later-cycle sector will lag a recovery in
stephen.tusa@jpmorgan.com the overall economy. With many companies in Multi-Industry having already given a
Phil M. Gresh, CFA peak into what 2010 should look like on non-fundamental items like restructuring
(1-212) 622-4861 savings and pension, we think that share price upside will require upside from the top
phil.m.gresh@jpmorgan.com line; and, we believe that top-line growth will be a challenge at this point in the
Drew Pierson recovery, given exposure to capital expenditure trends in later-cycle markets like
(1-212) 622-6627 non-residential construction, energy, and general industrial, all of which could
drew.a.pierson@jpmorgan.com
remain sluggish in 2010. Price/cost, which has been a significant driver of earnings
J.P. Morgan Securities Inc. stability in 2009, is an incremental risk area we are watching for 2010, as commodity
prices have been rebounding, but end-market demand is leading to pricing
3M (MMM).................................................OW
deceleration (and, in some cases, pricing declines). Restructuring has been another
Danaher (DHR).............................................N
Dover (DOV) ............................................. UW driver, but we think the benefits are known at this point, making 2010 all about the
Emerson Electric Co. (EMR) .................... UW top line.
General Electric Co. (GE).........................OW
Honeywell (HON)..........................................N Best Idea
Ingersoll Rand (IR)....................................OW
ITT Corp. (ITT)..............................................N Our best idea in the sector is General Electric (GE). We believe that GE is one of
Lennox International (LII)..........................OW the only stocks remaining in our sector for which a little good news could still go a
Rockwell Automation (ROK).....................OW long way, giving it the most compelling risk/reward in the group, in our opinion. On
Roper Industries (ROP) ............................OW GE Capital, we think sentiment remains negative, as fundamentals have not yet
SPX Corp. (SPW) .........................................N turned a corner, and investors remain skeptical about the longer-term earnings
Textron (TXT)............................................OW
potential. However, with consolidation in the financial services industry leading to
Tyco International (TYC) ..............................N
WABCO (WBC) ............................................N significantly less competition, new business is coming in at significantly higher
Watsco (WSO)..........................................OW returns, which we think will lead to better-than-expected normalized earnings in the
Watts Water Technologies (WTS)................N cycle ahead. On the Industrial businesses, fundamentals are clearly still challenged.
Wesco (WCC)...........................................OW However, the businesses here are solid long-term earners, driven by the key Energy
Infrastructure business, where pricing continues to hold. Our Dec-10 price target (fair
value) on GE remains $17, and this is one of the few stocks in our space with a fair
value target above the current stock price. However, in an upside case, we envision a
scenario where GE’s fair value could be $20 by the end of this year. On the flip side,
we see limited downside risk here, given stubbornly negative sentiment.
General Electric (GE) – Overweight – Dec 10 Price Target: $17.00

$16.17 $19.30 $5.73 Dec-09 $1.80 $0.95 $0.70 17.02 23.10 $172,170
11
December 2009
Engineering & Construction

Outlook Will Vary Significantly by End Market and Geography
Scott Levine AC Commercial outlook improving but will vary by end market. J.P. Morgan
(1-212) 622-5609 economists’ call for a robust economic recovery bodes well for the E&C group’s
scott.j.levine@jpmorgan.com prospects, though we expect the business outlook to vary widely both by end market
Rodney Clayton and geographic exposure. On the energy side, we see greater strength in upstream
(1-212) 622-2873 markets (LNG, offshore, oil sands) than in downstream (refining, petrochemicals),
rodney.c.clayton@jpmorgan.com and view overseas energy markets (such as Asia-Pacific, the Middle East, South
J.P. Morgan Securities Inc. America) as more attractive than domestic ones. We expect domestic power/process
markets to remain depressed, given excess capacity, weak demand, and regulatory
Chicago Bridge & Iron Co. NV (CBI) ........OW
uncertainty (particularly with regard to the fate of a new Energy bill), with tighter
EnergySolutions (ES) ...................................N
Mistras Group (MG) ..................................OW emissions standards potentially boding well for new capacity demand.
Pike Electric (PIKE) ......................................N
Quanta Services, Inc. (PWR) ...................OW We favor federal government markets over state-local infrastructure. On the
The Shaw Group, Inc (SHAW) .....................N government side, we continue to favor federal markets such as nuclear cleanup and
URS Corporation (URS) ...............................N military construction, given stable budget outlooks and high barriers to entry, with
stimulus funding potentially enhancing project flow from the DOE and the DoD. We
expect spending to be more muted in markets where state-local funding is critical
(including public infrastructure markets such as transportation and water), due to
fiscal pressure at the state level, as well as the uncertain status of a new Highway bill.
Although stimulus funding should help support the transportation market, we view
this as only a partial offset, and expect competition for such work to be intense,
though some attractive highway and transit work should arise from the bill.
Increased competition could pressure margins, boost execution risk. Although a
stabilizing (or improving) economy should bode well for a pickup in bookings (and
stabilization in backlog) in 2010, we’re concerned that increased competition (due to
slack caused by the downturn) could lead to a flattening out of (or declines in)
margins over the next few years. Given the duration of large infrastructure projects
(which can take over 2-3 years to complete), we expect any such impact to be drawn
out, with E&Cs that focus on engineering work or smaller projects likely to be
impacted earlier on. We could also see customers shift preference to fixed-price
contracts, which tend to carry high margins but also tend to place greater risk with
the contractor, which could lead to future project losses for several E&Cs.
Best Idea
Chicago Bridge & Iron NV is our top pick in E&C for 2010, due to its favorable
end-market mix, improving risk profile, and attractive valuation. CBI has above-
average exposure to oil & gas (including attractive upstream markets such as LNG
and oil sands) and is highly levered to activity in overseas markets. Although
execution risk is above average (CBI is finishing up a few fixed-price LNG projects),
we feel this is factored into CBI’s discount valuation (30%), with UK project risk
likely winding down by early 2010, and with lower-risk steel plate and technology
work potentially growing as part of CBI’s total booking mix.
Chicago Bridge & Iron Co. NV (CBI) – Overweight – Dec 10 Price Target: $22.50
$17.72 $21.44 $4.64 Dec-09 ($0.22) $1.75 $1.80 10.13 9.84 $1,763
12
December 2009
Environmental Services
Improving Volumes, Resilient Pricing Are Keys to a Better 2010
Scott Levine AC Following a strong 2008 in which the Environmental Services stocks outperformed
(1-212) 622-5609 the market by a sizable margin, the group has underperformed in 2009, as the
scott.j.levine@jpmorgan.com downturn has taken its toll on the business, and as investors shifted preference to
Rodney Clayton more depressed groups with greater leverage to an economic recovery.
(1-212) 622-2873
rodney.c.clayton@jpmorgan.com Volumes likely to improve in 1H10, but may not resume growth until 2H10. We
J.P. Morgan Securities Inc. think the group should deliver better performance in 2010, given reasonable
valuations (following a year of underperformance) and prospects for better top-line
Scott Levine: growth as cyclical pressures (most notably volumes and recycling) abate for this
Casella Waste Systems Inc. (CWST)...........N
largely domestic industry. That said, it is still too early in the cycle to expect volumes
IESI-BFC, Ltd. (BIN) .................................... rs
Republic Services Inc (RSG)....................OW
to turn positive, and this is a key trigger of the group’s operating leverage,
Stericycle Inc. (SRCL) ..............................OW particularly at the landfill, where incremental costs are negligible and incremental
Waste Connections (WCN) ......................OW margins can therefore be quite substantial. Our economists’ forecast for above-trend
Waste Management (WM)............................N GDP growth suggests we should see volumes improve next year (we forecast a
bottom in Q3), with declines moderating to the mid-single-digit range in 1H10 and
Rodney Clayton:
perhaps inflecting positive as early as 2H10.
Waste Services, Inc. (WSII)......................... rs
We expect pricing to hold up despite formidable challenges. Although we don’t
expect volumes to inflect positive until late next year at the earliest, moderating
volume declines and improving recycling trends should enable top-line growth to
improve starting in Q409. The group has exhibited strong price discipline since the
middle of the decade, though we think plenty of investors may remain unconvinced
that the majors can remain disciplined in the face of historic volume declines. We
think the majors will maintain pricing discipline in 2010, though we expect core
price growth to ease with falling inflation rates (our economists forecast sub-1% CPI
by late 2010). Although moderating core pricing could raise some “red flags” with
investors, continued gains in margin should help reinforce the pricing story in the
minds of investors, providing evidence that operating discipline remains intact across
the industry.
Best Idea
We expect Republic Services (RSG) to continue to demonstrate that its December
2008 merger with Allied Waste will be successful, with potential upside to synergy
targets ultimately driving upside to Street earnings expectations. Although most of
the early synergies have come from reduced overhead, we think financial synergies
could be a greater driver of value creation in 2010, as RSG could identify
opportunities to refinance (or eliminate) high-cost legacy Allied debt. In addition to
financial savings, we expect RSG to benefit from additional operating cost take-outs
(including the realization of increased disposal and routing synergies), as well as
greater landfill price leverage. We view RSG’s current valuation (6.8x ’10E
EV/EBITDA, a 7% discount to the peer group) as attractive and expect its discount
to narrow as it continues to de-lever its balance sheet.
Republic Services Inc (RSG) – Overweight – Dec 10 Price Target: $31.00

$28.57 $28.85 $15.05 Dec-09 $1.40 $1.48 $1.66 19.30 17.21 $10,861
13
December 2009
Machinery
Expected Recovery in Residential Construction Spending: Caterpillar Could Top Expectations
Ann Duignan AC J.P. Morgan’s economics team is now forecasting residential construction spending
(1-212) 622-0381 to be up 15-20% in 2010 (to about 650,000 units), and based on our analysis of the
ann.duignan@jpmorgan.com impact of this increase on equipment sales, we believe CAT’s 2010 revenue outlook
Ingrid Aja, CFA of a 10-25% increase may not be a stretch. If residential construction is up 20%, we
(1-212) 622-3730 believe that CAT may prove to be the outperformer of the Machinery sector in 2010.
ingrid.c.aja@jpmchase.com
Rahul Chada Best Idea

(1-212) 622-3549
Caterpillar could deliver significant upside in 2010
rahul.x.chada@jpmorgan.com
Construction equipment down more than 51% from peak. U.S. shipments of
construction equipment are currently running at 51% below the cycle peak
Actuant Corp (ATU) ......................................N
annualized level of $36 billion in early 2006 and are down 38% year to date (exports
AGCO Corp. (AGCO) ............................... UW supported the industry in 2008). Looking back to the 1990s, demand for equipment
Bucyrus International (BUCY) ......................N grew at a significantly lower rate than in the cycle just past and exhibited much lower
Caterpillar Inc. (CAT) ................................OW demand volatility (10% CAGR and standard deviation of 8%). Going forward, we
CNH Global (CNH) ................................... UW expect a similar trend to evolve with 1) housing starts driving the recovery in
Commercial Vehicle Group (CVGI) ..........OW
equipment demand and 2) a likely muted recovery, mirroring demand trends in the
Cummins Inc (CMI).......................................N
Deere & Co. (DE)..........................................N early 1990s.
Eaton Corp. (ETN) ........................................N
Illinois Tool Works (ITW)...........................OW
How the recovery evolves—used prices first. We would expect a recovery in
Joy Global (JOYG)........................................N activity to drive used equipment prices first, and as such we are monitoring monthly
Kennametal Inc. (KMT).................................N used rental equipment prices from Rouse Asset Services as a proxy for early signs of
Manitowoc Co. (MTW).............................. UW a recovery. We note used equipment prices have shown consistent improvement over
Navistar Int'l (NAV) .......................................N the past three months. In addition, we look to the ABI Index as a leading indicator of
Oshkosh Corp. (OSK)...................................N
a recovery in non-residential construction. In October, the index for future projects
PACCAR Inc. (PCAR)...............................OW
Parker Hannifin (PH).....................................N also improved and, as a result, we are cautiously optimistic on the outlook for a
Terex Corp (TEX) .........................................N recovery in non-residential construction activity going into 2011.
If construction activity is up, there is likely upside to CAT’s 2010 earnings. We

believe that the outlook for CAT’s earning power for 2010 and beyond may prove
conservative. Our scenarios for 2010 earnings begin with J.P. Morgan’s outlook for
housing starts up 15%, which indicates an EPS level of $2.47 vs. our current outlook
of up 10% and our current EPS estimate of $2.39; should starts reach the high end of
J.P. Morgan’s outlook, at up 20%, then CAT’s earnings could reach $3.00, about
25% above our current estimate.
Caterpillar (CAT) – Overweight – Dec 10 Price Target: $61.00

$59.68 $61.28 $21.71 Dec-09 $4.91 $2.05 $2.39 29.11 24.97 $36,921
14
December 2009
Marine Transportation
Trough Likely in Rearview Mirror as Demand Recovers, But Capacity May Limit ’10 Upside
Jonathan B. Chappell, CFA AC J.P. Morgan’s global economic outlook shapes the demand forecasts we use for the
(1-212) 622-6412 oil tanker and dry bulk shipping industries, and with our economists projecting GDP
jonathan.chappell@jpmorgan.com growth in excess of 3% in each of the next two years, we believe that the rate troughs
Darren T. Hicks experienced in both sectors in 2009 will not be revisited in the near future. However,
(1-212) 622-6571 our expectations for a rate and earnings recovery in 2010 are still tempered by the
darren.t.hicks@jpmorgan.com influx of scheduled new-build capacity in both segments next year, which will likely
J.P. Morgan Securities Inc. dilute the favorable impact we forecast from an economic-driven demand recovery.
Consequently, we expect tanker and dry bulk rates and earnings to remain volatile
Bristow Group Inc. (BRS) .........................OW
through next year, with demand spikes driving upside to rates, though likely at lower
Cal Dive International, Inc. (DVR) ................N
Capital Product Partners L.P. (CPLP) ..........N levels than achieved over the bull shipping markets of the last five years. We believe
DHT Maritime, Inc. (DHT).............................N investors will need to be nimble in their shipping investments, focusing on stocks of
Diana Shipping Inc. (DSX)........................OW those companies with superior balance sheets, limited capital commitments and bank
Eagle Bulk Shipping Inc. (EGLE).............. UW covenant concerns, and above-average time-charter coverage which helps provide
Frontline Ltd. (FRO).................................. UW earnings visibility and stability through what will likely be a volatile 2010.
Genco Shipping & Trading Ltd. (GNK) .....OW
General Maritime Corp. (GMR) ................OW Oil Tankers: We forecast that spot tanker rates will increase by 20-30% in ’10 from
Hornbeck Offshore Services (HOS) .........OW
the trough levels earned in 2009. We estimate that global oil demand will increase by
Kirby Corp (KEX) ......................................OW
Knightsbridge Tankers Ltd. (VLCCF) .......OW 1.1 million barrels per day in ’10, spurring OPEC production increases of 1.2% (or
Navios Maritime Holdings Inc. (NM).........OW nearly 2.5% in tanker ton-mile demand terms). We forecast supply growth of only
Navios Maritime Partners L.P. (NMM)..........N 12.4 mdwt (or 2.8%, versus 9.9% growth in 2009), as we expect most single-hull
Nordic American Tanker Shipping Ltd. (NAT)...N ships to be scrapped next year, and we project that 20% of the robust new-build
Overseas Shipholding Group (OSG)........ UW
delivery schedule will be delayed or cancelled owing to financing issues. Still, as
Ship Finance International (SFL)..............OW
Teekay Corporation (TK) .......................... UW
many tanker companies have heritage contracts expiring next year, we forecast year-
Teekay Tankers Ltd. (TNK) ......................OW over-year EPS declines at most of the tanker companies we follow in 2010.
Tsakos Energy Navigation (TNP)............. UW
World Fuel Services Corp (INT) ...............OW Dry Bulk: We forecast that one-year time-charter rates for the dry bulk industry will
decline by 2-12% in 2010 as a material rebound in demand driven by a synchronized
global economic recovery is outpaced by rampant capacity expansion. We estimate
that global dry bulk demand will increase by 5.1% next year, up from a 2.1% decline
in 2009; however, we forecast net fleet growth of 8.1% in 2010, even after assuming
50% of the scheduled new-buildings for next year are either delayed or cancelled and
decade-high scrapping. Although we expect dry bulk rates to remain volatile, we
believe that the demand-driven rate spikes will be capped by vessel deliveries. As
such, we only forecast year-over-year EPS growth for one dry bulk company in
2010: Overweight-rated NM, which is our top stock pick in this segment.
Best Idea
Knightsbridge Tankers (VLCCF) has one of the most favorable near-term EPS
outlooks of the tanker stocks under our coverage, with the company forecast to
remain in the black through ’10 and 35% EPS growth next year, helped by its 83%
time-charter coverage in ’09 and 67% for 2010. In addition, we forecast that VLCCF
will end ’10 with a total debt-to-capital ratio of only 25%, the second-best ratio in the
peer group by far. Finally, we believe VLCCF may reinstate quarterly dividends as
early as 1Q10 given the aforementioned favorable earnings and financial leverage
profile.
Knightsbridge Tankers (VLCCF) – Overweight – Dec 10 Price Target: $20

$13.08 $17.16 $11.00 Dec-09 $2.81 $1.20 $1.62 10.90 8.07 $225
15
December 2009
16
December 2009
Airlines
Consumer
2010: The Year of Demand Recovery
Jamie Baker AC Demand trends are strengthening, suggesting profits return. 2009’s primary
(1-212) 622-6713 challenge for U.S. airlines was a paucity of corporate demand. However, with the
jamie.baker@jpmorgan.com U.S. economy on the mend, corporate demand trends began showing evidence of
Scott Tan, CFA strengthening beginning in Q409. We believe this phenomenon will continue and
(1-212) 622-5541 accelerate as we pass into 2010 and budgets are reset, suggesting that industry
scott.b.tan@jpmorgan.com profitability lies just around the bend. Currently, we are modeling relatively tepid
Joseph Abboud revenue growth of 7% (vs. -17% in 2009), accompanied by $2.00/gallon spot fuel,
(1-212) 622-7059 flattish industry capacity, and ex-fuel CASM +1%. When combined with recent
joseph.a.abboud@jpmorgan.com
industry downsizing and the imposition of ancillary fees, these individual inputs
J.P. Morgan Securities Inc. suggest 2010 profitability akin to what was last witnessed in 2006—let’s call it
“good, but not great.” However, off this similar level of profitability in 2006, the
AerCap Holdings N.V. (AER)........................N
Aircastle Limited (AYR).................................N XAL at its nadir rested 67% above current levels, and at its peak a stunning 132%
AirTran Holdings, Inc. (AAI)......................OW above. The upside potential associated with the industry’s anticipated return to
Alaska Air Group, Inc. (ALK) ....................OW profitability should not be underestimated, in our view.
AMR Corp. (AMR).....................................OW
Babcock & Brown Air Limited (FLY) .............N Liquidity improved and capital appears sufficient for now. The industry
Continental Airlines, Inc. (CAL) ................OW successfully raised over $4 billion of incremental liquidity in the second half of 2009,
Copa Holdings, S.A. (CPA) ..........................N extinguishing any wintertime bankruptcy concerns. Raising money has long been this
Delta Air Lines, Inc. (DAL) ........................OW
sector’s forte and meaningful upheaval seems to have been averted again. Going into
Genesis Lease Limited (GLS) ......................N
GOL Linhas Aereas Inteligentes S.A. (GOL)....N 2010, fuel remains ever the wild card, though modest increases should be offset by
JetBlue Airways Corp. (JBLU) ......................N revenue recovery, with no additional need for incremental capacity cuts.
Southwest Airlines Co. (LUV) ................... UW
TAM S.A. (TAM) ....................................... UW Consolidation still not off the table. We remain of the view that the industry will
UAL Corp. (UAUA)....................................OW continue its gradual slog toward consolidation, both through hub rationalization and
US Airways Group, Inc. (LCC)......................N potential M&A. While the notion of a United-US Airways combination doesn’t
appear particularly popular, we believe such a combination has considerable merit.
Whether these particular managements are forced to embrace or choose something
more consensual may in part rest on industry fundamentals. Put differently, should
fuel prove uncooperative or demand unexpectedly worsen, the “shotgun” marriage
scenario grows more likely, in our view, potentially yielding significant industry
capacity and RASM benefits as early as the second half of 2010.
Best Idea
While we continue to believe a basket of airline equities offers the best risk-adjusted
approach to playing the recovery we now forecast, Delta Air Lines remains our sole
top pick. Delta generates roughly one-half of its revenue within the United States, an
estimated 30% of revenue across the Atlantic, 15% across the Pacific, and 5% to
Latin America. Furthermore, while all airlines are largely beholden to oil and
demand trends, Delta’s integration of Northwest Airlines remains in its infancy, and
offers an element of margin upside potential not shared by other Legacy names. Put
differently, wherever industry margins emerge in 2010, integration-related efficiency
should afford Delta an outcome <300 bps higher based on our estimate of
integration-related cost improvements. Lastly, while not immune to any
unanticipated fuel or demand shocks, Delta’s liquidity profile is above average for
similar U.S. network airlines. We maintain our 2010 price target of $20.
Delta Air Lines (DAL) – Overweight – Dec 10 Price Target: $20.00

$8.62 $12.65 $3.51 Dec-09 ($1.11) ($1.31) $1.70 N/M 5.07 $6,719
17
December 2009
Autos, Auto Parts, Tires, and Dealers

U.S. SAAR to Recover in 2010; Tire Industry Fundamentals Improving
Himanshu Patel AC We maintain a generally positive view across our entire coverage universe, noting
(1-212) 622- that auto sales are only in the early stages of a recovery.
analyst.name@jpmorgan.com
J.P. Morgan Securities Inc. In the United States, we remain convinced that auto sales will rise materially in the
next two years from the current roughly 10m SAAR rate. We see normalized U.S.
American Axle (AXL) ....................................N SAAR as 13m units, and believe this is likely by 2011. If cash for clunkers proved
ArvinMeritor, Inc. (ARM) ...............................N one thing, it was that pent-up demand exists and elasticity of demand has returned.
Autoliv (ALV).............................................OW
We note that U.S. auto sales typically have led unemployment by 4-6 quarters in
AutoNation, Inc. (AN)....................................N
Borg Warner Inc. (BWA)...........................OW
nearly every economic cycle—as such, if unemployment were to peak in late 2010, it
CarMax Inc. (KMX) .......................................N would be entirely consistent to expect auto sales to start rising right about now.
Cooper Tire & Rubber (CTB)....................OW
Dana Holding Corporation (DAN).................N Our sense is that the market has begun to pay for a U.S. SAAR recovery in a notable
Ford Motor Company (F) ..............................N way, but has refused to acknowledge the potential for an eventual European
Gentex Corporation (GNTX).........................N recovery, being more concerned near term with the potential post-scrappage payback.
Genuine Parts Company (GPC)...................N European auto production is likely to fall from 16.3m in 2009 to 15.5m in 2010 and
Goodyear Tire & Rubber (GT) ..................OW
then rise back to 16.5-17m in 2011. But lost in these figures is the fact that European
Group 1 Automotive, Inc (GPI) .................OW
Harman International (HAR) .....................OW production was 21.7m in 2007, suggesting normal European production is likely in
Hertz Global Holdings, Inc. (HTZ) ................N the ~19m range, firmly 10-15% above current investor expectations, in our view.
Johnson Controls, Inc. (JCI) .........................N While it is hard to get the market to focus on a European recovery when the (post-
Lear Corporation (LEA).............................OW scrappage) downturn has not even really started, this eventually may be the next
Magna International, Inc. (MGA) ..............OW sustained leg up in automotive equity valuations.
Penske Automotive Group, Inc. (PAG).....OW
Sonic Automotive, Inc. (SAH) ...................OW Tire industry fundamentals have also begun to improve. Consumer replacement tire
Tenneco Automotive (TEN) ......................OW
shipments in the U.S. have now shown four consecutive months of y/y growth, and
TRW Automotive (TRW)...........................OW
other end markets appear ready to recover as well (consumer OE, commercial).
Further, while raw material costs are rising, early signs are emerging that the industry
will attempt to compensate (perhaps more than compensate) for this with price hikes.
Goodyear and Sumitomo have announced recent price hikes, and we expect other
major tire makers to follow. We believe Goodyear, after its recent pullback, would be
the best way to play a recovering global tire cycle.
Best Idea
TRW, despite its recent run, seems to offer the best risk/reward, in our view. The
company has many attributes we like: high (55%) exposure to Europe, a region
where a recovery is likely not fully priced in; financial leverage (provides strong EPS
uplift on small revenue changes) but no near-term debt maturities or covenant issues;
and a fairly strong operating history. The market seems to be working with a $2.50-
3.00 normalized EPS assumption, which seems to be penciling in a U.S. SAAR
recovery to 13m and some debt refinancing–related benefits. But we think this, plus a
production recovery in Europe, argues for closer to $4 of normalized EPS, suggesting
the stock could still have substantial upside potential. We generally view TRW as a
10x P/E stock.
TRW Automotive (TRW) – Overweight – Dec 10 Price Target: $24.00

$23.29 $24.05 $1.38 Dec-09 $0.13 $0.43 $1.60 54.16 14.56 $2,740
18
December 2009
Beverages
Sticking with Multinationals
John Faucher AC
We continue to favor companies with emerging markets exposure. Looking back
(1-212) 622-6443 at 2H09, our focus was on companies with higher international and emerging
john.faucher@jpmorgan.com markets exposure. As we head into 2010, this remains our focus as we feel these
Neal Rudowitz companies continue to offer attractive valuations with higher growth rates.
(1-212) 622-0094 Companies with emerging markets exposure are still trading relatively in line (3%
neal.m.rudowitz@jpmorgan.com premium) vs. companies without such exposure. This 3% premium is significantly
Sofya Tsinis below the 20-year average of a 12% premium. Given the lackluster consumer trends
(1-212) 622-6391 in developed markets, these companies with emerging markets exposure should grow
sofya.s.tsinis@jpmorgan.com
faster on an underlying basis (and have historically), while also benefiting from a
Peter K Grom weaker dollar in 2010. This should help them begin to regain their historical
(1-212) 622-4876 premium.
peter.k.grom@jpmorgan.com
J.P. Morgan Securities Inc. We expect names with more domestic exposure to continue to benefit from modest
raw material costs, but we are somewhat concerned about top-line trends given the
Brown-Forman Corp (BFb) ....................... UW weak consumer.
Coca-Cola Co. (KO)..................................OW
Coca-Cola Enterprises (CCE) ......................N On the alcoholic beverages front, our negative stance for 2009 appears to have
Coca-Cola Hellenic Bottling Company (HLBr.AT) UW played out. With these stocks having substantially underperformed the group in
Constellation Brands (STZ) ..........................N
2009, we could see a better year in 2010. We think the negative impact to sales from
Dr Pepper Snapple Group (DPS) .................N
Hansen Natural Corp. (HANS) .....................N
destocking has come to an end (mainly in developed markets), and we are beginning
Molson Coors Brewing Company (TAP) ..OW to cycle weak on-premise trends. While we don’t expect an acceleration in
Pepsi Bottling Group, Inc (PBG)...................N consumption or a restocking effect just yet, we think the worst may be over and
PepsiAmericas (PAS) ...................................N would be opportunistic buyers through the year.
PepsiCo (PEP)..........................................OW
Best Idea
Within our beverage universe our top pick for 2010 is PepsiCo (PEP). While the
company should continue to face pressure in the near term, we think there are many
catalysts for the stock over the next 12 months. PEP’s multiple is currently depressed
as the deal for the bottlers and weak NA beverages remain overhangs. This is despite
the fact that the company’s overall organic growth rate is still at the top of its peer
group (second only to Colgate year to date among our large-cap universe).
We expect the company’s P/E multiple to expand 2-3 points back to historical levels
once the deal closes and investors begin to get comfortable with the new NA
beverage strategy. In addition, we think the Gatorade brand trends have bottomed
and expect sequential improvement, which should help sentiment and earnings. From
an EPS standpoint, the company should deliver double-digit EPS growth for the next
two years, with accelerated reinvestment and flexibility from synergies on the bottler
deal. Also driving EPS should be the international division, which should continue to
put up double-digit top- and bottom-line growth and get the benefit from a weaker
dollar.
PepsiCo (PEP) – Overweight – Dec 10 Price Target: $74.00

$63.87 $63.93 $43.78 Dec-09 $3.66 $3.76 $4.18 16.99 15.28 $99,666
19
December 2009
Building Materials
Housing Recovery and Stimulus Spending Expected to Offset Weak Non-Housing Market
Mike Betts AC The building materials sector underperformed in the United States in the first four
(44-20) 7325- 8976 months this year but, with some volatility, has broadly performed in line since then.
mike.f.betts@jpmorgan.com It is currently trading on a comparatively high trailing-12-month P/E of 61.5x,
J.P. Morgan Securities Ltd. reflecting the cyclically depressed earnings.
Cemex (CX) ..............................................OW We expect the outlook for volumes to improve, driven by recovery in the housing
Eagle Materials (EXP) ..................................N market and stimulus spending on highways. The recent lead indicators, though
Martin Marietta Materials (MLM)...............OW choppy, suggest improvement in the housing market. Our economics team forecasts a
Vulcan Materials (VMC)............................OW
gradual improvement in housing starts from 590m in Q3 2009 to 830m in Q4 2010
and 950m by Q4 2011. The majority of the infrastructure spending due to the
stimulus program is expected to take place in 2010. However, we remain cautious
due to the possibility that it will just be used as a substitute for other sources of
funding. Historically, aggregate prices in the U.S. have increased by less than
inflation. However, price increases were more substantial in 2005-07. Recently,
despite the significant declines in aggregate volumes, prices continue to show
improvement.
The downturn in the non-housing market started later than in the housing market,
around 12 months after the downturn in housing. We expect volume of non-housing
work to decline by 15% in 2010, before stabilising in 2011.
Best Idea
Our top pick for 2010 is Vulcan Materials (VMC). Our mid-cycle EPS-based 12-
month price target of $62 is more than 26% above the current share price.
We believe Vulcan’s exposure to the southern states of California and Florida should
make it a major beneficiary of the housing market recovery. In our view, these two
states, which we estimate accounted for 36% of Vulcan’s sales in FY08, are
particularly cyclical. We estimate that Vulcan’s businesses in Florida and California
are currently incurring losses, but we expect a sharp recovery with a 60% gross
margin on the first 10-15% increase in volumes.
In our view, there are two main risks to our rating and price target for Vulcan
Materials. First, our aggregate volume and pricing expectations could be too
optimistic. Second, there is the possibility of a late recovery in the California and
Florida housing markets.
Vulcan Materials (VMC) – Overweight – Nov 10 Price Target: $62.00

$48.58 $77.95 $34.30 Dec-09 $2.41 $0.41 $1.19 118.49 40.82 $6,092
20
December 2009
Gaming
Domestic Stabilization Fueled by Strong GDP in 2010, Growth in Asia—Positives for LVS
Joseph Greff AC While growth via new markets, expansions of existing markets, and the overall
(1-212) 622-0548 proliferation of gaming in general has made it difficult to quantify the
joseph.greff@jpmorgan.com relationship between GDP and gaming revenues over the past two decades, we
Carlo Santarelli view a synchronized global recovery in GDP as a distinct positive for gaming
(1-212) 622-1305 operators in our coverage universe. Historical data, from 1995 to the present,
carlo.santarelli@jpmorgan.com suggests a significant correlation between GDP and domestic gross gaming revenue
Daniel Yoon (0.93). Moreover, when evaluating the period post-9/11, from 2003 to 2006, GDP
(1-212) 622-1205 grew at a 2.9% CAGR while gross gaming revenues grew at an 11.9% CAGR. As
daniel.yoon@jpmorgan.com
such, we believe that the positive momentum from GDP growth, as well as
J.P. Morgan Securities Inc. international GDP growth, most notably in China, will help stem the declines in
gross gaming revenue displayed throughout 2008 and 2009.
Ameristar Casinos, Inc. (ASCA) ...............OW
Bally Technologies, Inc. (BYI) ..................OW Despite the prospects of solid GDP growth in 2010, we do not believe 2010 will
Boyd Gaming Group (BYD) ...................... UW
be a year of same-store gaming revenue growth in the United States. While we
Hasbro, Inc. (HAS)........................................N
International Game Technology (IGT)......OW expect 2009 to represent the trough for gaming revenues, we do not believe 2010 will
Las Vegas Sands Corp. (LVS) .................OW exhibit tangible revenue growth. That being said, we do believe international
Mattel, Inc. (MAT) .........................................N markets, the most notable of which is Macau, have the potential for growth. We are
MGM Mirage (MGM).................................OW currently forecasting mid-single-digit same-store revenue growth for Macau for
Penn National (PENN)..............................OW 2010. Furthermore, despite our cautious stance on domestic revenue growth in 2010,
Pinnacle Entertainment (PNK)..................OW
Shuffle Master (SHFL)..................................N
we do believe operators, most notably LVS, will grow EBITDA via expense
WMS Industries (WMS) ............................OW reductions.
Wynn Resorts (WYNN).................................N
Best Idea
Our Overweight rating on Las Vegas Sands (LVS) is based on: 1) the positive
operating momentum in the Macau market and the ensuing operating leverage gains
given its operating expense reductions in Macau; 2) the recent Hong Kong IPO of its
Macau operations, which improves liquidity and solidifies the balance sheet; 3) the
reasonable and achievable expectations for its LV Strip properties and our belief that
its LV properties are outperforming peers; and 4) the potential for continued
improved investor sentiment in front of the mid-2010 opening of its Singapore
property, which could be a positive catalyst.
Las Vegas Sands (LVS) – Overweight – Dec 10 Price Target: $22.00

$16.12 $20.73 $1.38 Dec-09 $0.25 $0.13 $0.41 124.00 39.32 $10,644
Estimates and price target shown above reflect adjustments made on December 2, 2009.
21
December 2009
Homebuilding & Building Products

Remain Positive on Homebuilders; KBH Top Idea; We Also Like TOL and LEN
Michael Rehaut, CFA AC We remain positive on the homebuilding sector in 2010. While the builders are
(1-212) 622-6696 currently up 56% from their March 2009 lows, given historical rallies have averaged
michael.rehaut@jpmorgan.com roughly 270% from major pullbacks, we believe material upside to the group
Ray Huang, CFA remains. Fundamentally, we believe demand is likely to slowly recover over the next
(1-212) 622-0547 24 months, as we note both total starts and new home sales remain near record lows,
ray.huang@jpmorgan.com 65% and 48% below their long-term averages, respectively, and typically improve
J.P. Morgan Securities Inc. coincident with GDP growth. As a result, we estimate positive y/y order growth for
the group of roughly 15% in 2010 vs. 2009’s 14% decline. Moreover, given the
Beacon Roofing Supply (BECN)...................N
builders’ solid capital positions relative to those of their private counterparts, we
Beazer Homes (BZH) ............................... UW
Black & Decker Corp. (BDK) ....................... rs believe share gains are likely over the next several years. These gains should drive
D.R. Horton (DHI) .........................................N volume growth and SG&A leverage, while lower incentives should drive gross
Fortune Brands (FO).....................................N margin expansion. In addition, while supply is still an issue, we believe it has
Hovnanian Enterprises (HOV) ......................N become more manageable and note supply is down solidly across many key
KB Home (KBH)........................................OW homebuilding markets, such as CA, FL, and AZ. Lastly, we believe the strong price
Lennar (LEN) ............................................OW
Masco Corp. (MAS) .................................. UW
declines over the past two years should now serve as a positive catalyst in terms of
MDC Holdings (MDC) ............................... UW affordability being near all-time highs, which should also spur demand. Regarding
Mohawk Industries (MHK) ............................N valuation, the group currently trades at only 0.96x P/B (ex-adjusted FAS 109), at the
Owens Corning (OC) ................................OW low end of its historical 1.0-2.0x range, which we view as attractive. Our best idea in
PGT, Inc. (PGTI).......................................OW the group is KBH, followed by TOL and LEN, all Overweight-rated names.
Pulte (PHM) ..................................................N
Ryland Group (RYL) .....................................N We remain slightly cautious on the building products sector in 2010. Specifically,
Standard Pacific (SPF) ............................. UW
while sales and margins should improve, we believe improvement will be relatively
The Stanley Works (SWK)........................... rs
Toll Brothers (TOL) ...................................OW
modest as the overall macro environment remains challenging. In addition, we
USG Corporation (USG)...............................N believe valuations are, by and large, full.
Whirlpool (WHR)....................................... UW
Best Idea
Amid our positive homebuilding sector stance, we highlight KB Home (KBH) as
our top idea. Trading at only 0.79x P/B (ex-adjusted FAS 109), an 18% discount to
its larger-cap peers, its valuation is attractive, in our view. While we estimate
additional impairments for KBH representing roughly 17% of current equity, above
our universe average of 11%, we believe KBH’s solid efforts regarding value-
engineering and positioning its product at the lower price points of the marketplace
should drive sustained order growth improvement, and therefore upside to the stock.
Regarding our Dec 10 price target of $25.50, we apply a 1.66x P/B multiple on our
year-end 2010 book value estimate of $16.51. Our 1.66x multiple represents a 10%
premium to its historical 10-year average multiple, which we believe is appropriate at
this point in the cycle.
KB Home (KBH) – Overweight – Dec 10 Price Target: $25.50

$13.69 $20.70 $7.85 Nov-09 ($8.00) ($3.07) ($1.20) N/M N/M $1,206
22
December 2009
Household Products & Personal Care

Finding Where Improving Top-Line Growth Isn’t Priced In
John Faucher AC
We expect 2010 to be marked with positive earnings revisions for the Household
(1-212) 622-6443 Products and Personal Care companies under our coverage, as they benefit from a
john.faucher@jpmorgan.com weaker U.S. dollar, improvement in the global macroeconomic backdrop, and
Sofya Tsinis normalization in consumption trends.
(1-212) 622-6391
sofya.s.tsinis@jpmorgan.com While pricing has been the primary driver of organic top-line growth throughout
Neal Rudowitz 2009 and has offset weaker volumes, we expect trends to reverse in 2010, as volume
(1-212) 622-0094 should pick up once again as companies cycle easier comps. We believe the impact
neal.m.rudowitz@jpmorgan.com of retailer de-stocking and consumer pantry de-loading will be largely behind the
Peter Grom companies and that the risk from retailers’ shelf assortment is manageable, especially
(1-212) 622-4876 for those with number one and two shares in their categories. We also think that mix
peter.k.grom@jpmorgan.com can improve in 2010, as consumers may trade back up.
Although we expect the macro environment to improve throughout 2010, we think it
Alberto-Culver (ACV) ................................OW will remain challenging, and as a result do not expect companies to implement
Church & Dwight (CHD)................................N further price increases, unless there is a substantial further increase in raw materials
Clorox (CLX) .............................................OW prices. Historically, HPC companies have been able to manage through a rising cost
Colgate-Palmolive (CL).............................OW environment reasonably well.
Energizer Holdings (ENR) ............................N
Estee Lauder (EL).........................................N We think earnings upside will be greatest for the multinational companies, as they
Kimberly-Clark (KMB) ...................................N will be the largest beneficiaries from a weaker U.S. dollar, but we also believe that
Newell Rubbermaid Inc. (NWL) ................OW
Procter & Gamble (PG).................................N
valuations will play a key role in stock-picking in 2010. Although valuations for the
Tupperware Brands (TUP) ...........................N HPC companies have moved up from their 15-year lows, these companies are still
largely trading at a double-digit discount relative to the market and their historical
averages based on next-twelve-month (NTM) consensus estimates.
Best Idea
Clorox (CLX) is currently our top pick in our HPC group for 2010. We view the
company’s current valuation of about 14x our NTM earnings estimate as attractive.
The stock is trading at a 19% discount to its five-year historical average and at a
roughly 10% discount to its large-cap HPC peers (PG, CL, and KMB); over the past
five years CLX has traded at parity with its large-cap HPC peers.
We think that the stock’s current valuation does not account for the expected
sequential improvement in top-line trends throughout FY10. We also think there is
upside to guidance and consensus for FY10 and believe that our estimate of $4.23,
which is above CLX’s guidance range of $4.05-4.20, may still be too low. Although
spot resin prices have been moving up, we believe CLX is well positioned to mitigate
this impact via cost savings and pricing, if necessary.
While CLX’s top-line exposure to international markets of 19% is less than many of
its peers, the company should still be a beneficiary of a weaker U.S. dollar over the
next year.
Clorox (CLX) – Overweight – Dec 10 Price Target: $67.00

$60.73 $61.87 $45.67 Jun-10 $3.81 $4.23 $4.63 14.36 13.12 $8,491
23
December 2009
Lodging
2H10 to Mark the Beginning of the Next Lodging Upcycle
Joseph Greff AC We believe that a significant and sustained recovery in GDP growth would be a
(1-212) 622-0548 distinct positive for the lodging industry, given the high correlation between
joseph.greff@jpmorgan.com lodging demand and GDP growth. A pronounced recovery would directly benefit
Kevin Milota corporate transient, group, and leisure lodging demand. Typically, organic RevPAR
(1-212) 622-0987 growth occurs 2-3 quarters following the point when GDP turns positive. Given the
kevin.milota@jpmorgan.com turn to positive territory in 3Q09, we expect RevPAR to flatten in late 2Q10, and the
Daniel Yoon industry could begin to see positive RevPAR results as early as 3Q10 with sustained
(1-212) 622-1205 GDP growth of 3% and 4% in the first half of 2010. We believe this sustained and
daniel.yoon@jpmorgan.com
significant recovery in GDP will provide the catalyst for U.S. lodging demand to
J.P. Morgan Securities Inc. grow in a more meaningful way. This increase in demand (and subsequent increase
in average daily rates) should provide the impetus for investors to appreciate fully the
Choice Hotels International (CHH) ...............N
beginnings of the next lodging upcycle in 2H10.
Host Hotels & Resorts Inc. (HST).................N
LaSalle Hotel Properties (LHO) ....................N
We continue to believe the lodging industry will experience a meaningful
Marriott International (MAR) .........................N
Orient-Express Hotels (OEH) .......................N RevPAR recovery in 2011 and beyond. However, a greater-than-expected rebound
Starwood Hotels & Resorts Worldwide (HOT).......OW in the U.S. could bring the turning point in—as historically low projected supply for
Sunstone Hotel Investors Inc. (SHO) ...........N 2010-2012 (versus historical average of +2.1%), coupled with greater-than-expected
Wyndham Worldwide (WYN)....................OW demand increases, would allow the industry to more quickly work through low
occupancy levels and thereby help strengthen average daily rates. In the end, we
believe the “wild card” for fundamentals as we move through the first half of 2010 is
how strong and lasting the recovery in GDP will be.
During periods of economic weakness, as measured by declines in GDP, lodging

stocks tend to lead the decline and then lead the recovery. When GDP increased
2.5% or more sequentially, lodging stocks experienced a 6.5% return increase.
However, when GDP was below 2.5% sequentially, lodging stocks experienced a
5.8% return decline. In quarters when GDP accelerated, lodging stocks appreciated
5.1% on average. In quarters when GDP decelerated, lodging stocks declined 1.4%
on average.
Best Idea
Wyndham Worldwide (WYN) remains our top pick in the lodging sector given:
1) its substantial valuation discount to its peers; 2) its underappreciated and
improving free cash flow generation; and 3) its solid balance sheet. We strongly
believe that WYN’s valuation discount to its lodging peers is undeserved, and that
over time the discount will narrow.
Wyndham Worldwide (WYN) – Overweight – Dec 10 Price Target: $26.00

$18.95 $19.98 $2.77 Dec-09 $2.06 $1.78 $1.61 10.65 11.77 $3,385
24
December 2009
Packaged Food
A 1H Diet and a 2H Feast
Terry Bivens AC Our economics and equity strategy teams maintain a sanguine first-half 2010 outlook
(1-212) 622-0326 for both the economy and the stock market. Expansion is expected to be led by
terry.bivens@jpmorgan.com business investment while the consumer continues to be pressured by high
Jason English unemployment and a stressed balance sheet. While the economic recovery is
(1-212) 622-0336 expected to continue through the second half of 2010, our equity strategy team
jason.english@jpmorgan.com believes the markets may stall and investors may become more risk averse.
A combination of sluggish volume expansion for packaged food firms, on a weak
Archer Daniels Midland (ADM) .....................N consumer, and investors seeking higher beta, on a continued rally, may lead to
Bunge Limited (BG) ......................................N underperformance for the packaged food sector through the first half of 2010. The
Campbell Soup Company (CPB)..................N
group, however, may be poised to outperform the market in the second half if the
ConAgra Foods (CAG) .................................N
Dean Foods (DF) ......................................OW rally does stall and investors migrate to lower-beta staples names.
General Mills (GIS) ...................................OW
H.J. Heinz Co. (HNZ)................................OW Best Idea
Hain Celestial Group (HAIN) ........................N General Mills (GIS) is our top pick as 2010 approaches. The firm’s portfolio is
Hershey (HSY)............................................. rs
Kellogg (K) ................................................OW
skewed towards product categories that have proven recession-resistant and should
Kraft Foods (KFT) ........................................ rs continue to appeal to a value-seeking consumer (e.g., cereal, canned soup,
Mead Johnson Nutrition (MJN).....................N refrigerated dough products, yogurt, and baking mixes). Mills holds strong number
Sara Lee (SLE) ............................................ rs one or two positions in each of its key categories, and its industry-leading investment
in marketing and innovation bodes well for continued market share expansion and
relative outperformance in volume growth.
Top-line outperformance likely will be magnified on the bottom line as its Holistic
Margin Management (HMM) program continues to bear fruit. The firm’s margin
expansion has dramatically exceeded its peers’ of late as it captures efficiencies,
benefits from a favorable mix shift, and has favorable input costs. The input cost
benefits will abate as 2010 progresses, as they will for the group at large, but we
expect the company’s efficiency gains and favorable mix shift to continue.
Meanwhile the firm continues to benefit from a low interest rate environment and
buy back shares. We expect low-double-digit EPS growth in FY10.
GIS has been strong of late but valuation remains attractive, in our view. Its forward
P/E remains well below its historical norm and is discounted to best-in-class
consumer staples peers such as K (-0.2x), PEP (-0.6x), PG (-2x), and KO (-2x). We
expect near-term appreciation as its valuation gap is closed and appreciation could
continue in the back half as risk-averse investors migrate to the highest-quality
staples names. Risks to our rating and price target include higher-than-anticipated
cost inflation, more aggressive competitive activity, or a less favorable product mix
shift.
General Mills (GIS) – Overweight – Dec 10 Price Target: $75.00

$68.68 $69.10 $46.37 May-10 $3.89 $4.49 $4.79 15.30 14.34 $22,430
25
December 2009
Restaurants
Continued High Unemployment and Risk of Rising Food Costs Warrant Selectivity
John Ivankoe AC In the context of positive GDP growth but still-high unemployment through 2011, we
(1-212) 622-6487 believe selectivity across the restaurant sector will be key for 2010. In our view,
analyst.name@jpmorgan.com domestic employment is the biggest determinant of overall restaurant traffic—
Steven Rees particularly in the breakfast- and lunch-dominated Quick Service category, and
(1-212) 622-6575 expected y/y declines in total employment through 2Q10 will likely continue to
analyst.name@jpmorgan.com pressure reported sales for the U.S.-dominated restaurant companies. As such, we
Renato Basanta, CFA favor exposure to the global QSR companies like Overweight-rated McDonald’s,
(1-212) 622-5331 where solid international results should continue and the impact from changes in
analyst.name@jpmorgan.com
U.S. comps/margins is minimal. In addition, excessive cost-cutting and record-low
J.P. Morgan Securities Inc. commodity prices have allowed most companies to meet/achieve earnings targets in
2009. While J.P. Morgan economists expect core inflation to remain at historically
Brinker International (EAT) .......................OW
low levels below 1%, we believe food commodity costs will begin to show y/y
Burger King (BKC) ........................................N
Darden Restaurants (DRI)........................OW increases starting in 2H10 as record-low levels are lapped. In the casual dining
Domino's Pizza Inc (DPZ).........................OW sector, 100 bps of margin improvement is worth close to 2x the impact of a point of
McDonald's (MCD)....................................OW comps, warranting selectivity in the space, despite expectations for a gradual comp
P.F. Chang's China Bistro (PFCB) ...............N recovery in 2010. We favor companies such as Darden and Texas Roadhouse that
Starbucks (SBUX).....................................OW operate in differentiated, less competitive segments of casual dining, offer
Sysco Corporation (SYY) .............................N
The Cheesecake Factory, Inc. (CAKE) .... UW
compelling value, and have relative pricing power and untapped opportunities to
Tim Hortons Inc. (THI.TO) ............................N manage cost structures if sales trends continue to lag into 2010.
Wendy’s/Arby’s Group (WEN) ......................N
Yum Brands (YUM)...................................OW Best Idea
Our top pick in the restaurant sector is Overweight-rated Darden Restaurants
(DRI). We continue to believe properly low-set sales expectations (our blended
comp estimate remains down 3% vs. current guidance of down 3% to flat and
previous guidance of down 2% to flat) will be matched with an increased focus on
costs. We expect continued outperformance at Darden’s dominant concepts—Olive
Garden and Red Lobster—which represent 82% of company revenue and are in
differentiated Italian and Seafood segments, making these brands less susceptible to
competition, and in particular bar and grill promotional activity. These concepts
should also benefit from strong marketing of everyday value and new product
introductions. In addition, Darden is one of the few in casual dining that has not cut
corporate, regional, divisional, or store-level costs including real estate or training
personnel. Despite being closer to peak margins than other companies (but F09 store
margins still off 190 bps from levels seen in F07, and 100 bps of margin
improvement is worth $0.37 to EPS, by our estimates), Darden has much more cost-
management opportunity than its peers, we contend. Our December 2010 price target
is $40, which represents a 15x multiple on our F10 EPS estimate, at the low end of
historical casual dining averages.
Darden Restaurants (DRI) – Overweight – Dec 10 Price Target: $40.00

$31.83 $41.21 $15.77 May-10 $2.66 $2.66 N/A 11.97 – $4,444
26
December 2009
Retailing – Broadlines & Department Stores

If It Ain’t Broke . . . Don’t Fix It—Stay Barbelled into 2010
Charles Grom, CFA, CPA AC 2008 winners take the lead again in 2010 . . . Given a sober macro backdrop with
(1-212) 622-6527 unemployment still hovering near the double-digit mark and a return to unbridled
charles.grom@jpmorgan.com discretionary spending unlikely, we believe retailers levered to value will again fall
Aaron Stein back into favor after more/less underperforming through 2009. The key themes in
(1-212) 622-6654 2010, in our view, will be: (1) investing in market share gainers via positive SSS (led
aaron.d.stein@jpmorgan.com by traffic); (2) operating leverage with fixed-cost hurdle rates structurally lowered in
Paul Trussell, CFA 2009; and (3) a return to share buybacks as cash is put to work. Specifically, we
(1-212) 622-5671 believe the discounters, warehouse clubs, and dollar stores are best positioned to
paul.e.trussell@jpmorgan.com
outperform in 2010 (the same group that led in 2008), with the more discretionary
Radina L. Russell names taking a breather after a strong run in 2009.
(1-212) 622-8738
radina.l.russsell@jpmorgan.com . . . but pick your battles—stay barbelled. As the bifurcation in retail trends
J.P. Morgan Securities Inc. continues with some bellwether discretionary names falling back under pressure and
trade-down stalwarts returning to the spotlight, we have more conviction than ever in
Big Lots, Inc. (BIG) ...................................OW our barbell long approach to the Broadlines space. Our portfolio favors a basket of
BJ's Wholesale Club (BJ) .............................N retailers that “are working”—positive traffic and attractive earnings potential (COST,
Costco Wholesale Corporation (COST) ...OW
WMT, and DLTR)—on one side of the barbell coupled with those names that still
Dollar Tree, Inc. (DLTR) ...........................OW
Family Dollar Stores, Inc. (FDO) ..................N may be under pressure, but with improving fundamentals (KSS, TGT, BIG, and M)
JCPenney Corporation (JCP) ...................OW on the other side. Although there could be some rotation in constituents through the
Kohl's Corporation (KSS)..........................OW year, we believe that a balanced long book is the prudent approach.
Macy's Inc. (M)..........................................OW
Nordstrom, Inc. (JWN)..................................N Top-line growth necessary for the next leg up. Through most of 2009, investors
Saks, Inc. (SKS) ...........................................N appeared willing to accept “less bad” as good enough in regards to the top line with
Target Corporation (TGT).........................OW earnings on the mend, as (1) costs cuts (permanent and temporary), (2) GPM
Wal-Mart Stores, Inc. (WMT)....................OW
stabilization via inventory control/lower sourcing costs, and (3) improved balance
sheets were the main catalysts pushing retail stocks higher in 2009. Looking forward,
we see a reduced willingness to look through soft SSS performance and believe
retailers that demonstrate consistent improvements in traffic/comps will be rewarded
(similar to 2008). Conversely, retailers with decelerating sales/traffic momentum
(and ceding share) may fall under pressure despite expense-controlled earnings
resilience.
Best Idea
With membership trends steady, traffic robust, and an improving macro backdrop,
Costco in our opinion is well positioned to deliver earnings upside over the next few
quarters, and we highlight COST as our best long idea in 2010. Costco is almost a
natural barbell—with exposure to both the traffic-driving consumable categories and
more discretionary areas. Recent results suggest both sides of the store are “working”
with discretionary categories recovering after underperforming through the
downturn, coupled with food deflation abating. Further, after serving as a drag in
2009, FX and gas turn to tailwinds in 2010, helping push the top line (and a source of
operating leverage). Finally, whereas 2009 proved to be one of the most difficult
years in Costco’s history with ~$0.20/share of one-time items weighing on earnings,
we believe the company will benefit in 2010 as headwinds reverse course, improving
an already industry-leading sales productivity north of $1,000 per sq. ft.
Costco Wholesale (COST) – Overweight – Dec 10 Price Target: $64.00

$60.73 $61.25 $38.17 Aug-10 $2.56 $2.86 N/A 21.23 – $26,478
27
December 2009
Retailing – Food
Sector Challenges Still Persist . . . But Some Light Exists at the End of the Tunnel
Charles Grom, CFA, CPA AC Sector challenges still persist . . .

(1-212) 622-6527 Food deflation remains an overhang. In October, the PPI Finished/Processed
Charles.Grom@jpmorgan.com Consumer Food index declined 2.6% and the CPI Food at Home declined 2.8%
Radina Russell (largest decline on record)—an indication that food deflation is a substantial
(1-212) 622-8738 headwind for the grocers and Wal-Mart.
Radina.L.Russell@jpmorgan.com
Unemployment remains high. Unfavorable trends in unemployment are a negative
Aaron Stein for supermarket sales as demonstrated by the 66.3% inverse correlation between
(1-212) 622-6654
Aaron.D.Stein@jpmorgan.com
supermarket ID sales and national unemployment rates during the past three
recessions. Looking ahead, given that J.P. Morgan Economists expect the jobless rate
Paul Trussell to move up to 10.5% in 1Q10 and remain in the 10% range through 3Q10, this
(1-212) 622-5671
Paul.E.Trussell@jpmorgan.com
pressure on discretionary spending is likely to continue.
J.P. Morgan Securities Inc. Intense market competition is here to stay. Value-focused discount stores and
warehouse clubs have long competed in food/consumable categories. However,
Kroger Co. (KR) ........................................OW recent strength in volume trends, especially at Wal-Mart, Costco, and BJ’s, suggests
Ruddick Corporation (RDK)..........................N that the grocers are donating share.
Safeway (SWY) ............................................N
SuperValu, Inc. (SVU) ..................................N . . . and consumer spending remains cautious . . .
Whole Foods (WFMI)....................................N Low-price operator = win/win. Low prices continue to be the name of the game
these days as those retailers with value positioning continue to enjoy better traffic
than peers with more premium positioning. Although some upscale retailers have
been successful in re-branding themselves as more affordable (e.g., Whole Foods),
many continue to struggle to convince the newly cautious consumer that they offer
competitive prices (Safeway). Until we see a change in consumer behavior, we
expect this focus on price to continue.
. . . but some light ahead as deflation turns to inflation
While food deflation continues to be a challenge, macro data indicate that the
situation is improving—giving us encouragement on the stabilization front. To this
point, (1) the PPI Finished/Processed Consumer Food index continues to move in the
right direction both sequentially and y/y; (2) the CPI Food at Home index appears to
be nearing a bottom; and (3) grocery store retail sales are finally showing signs of
life with a 0.4% y/y increase in October. All in, we expect to see a return to very
modest inflation sometime in 2010.
Best Idea
Kroger (KR) is our top pick in the Food Retailing space for four reasons: (1) as
outlined above, the potential for food price reflation in early 2010 should provide
some support to sales trends and potentially allow for the stock’s multiple to expand;
(2) the company’s positioning as the low-price operator has resonated well—keeping
traffic and non-fuel ID sales in positive territory—a trend we see continuing; (3) KR
continues to drive high volume through its box (branded and private label), allowing
it to gain share from competitors; and (4) we think the company’s FY09 EPS
guidance of $1.90-2.00 looks achievable (unlike its peers’). All in, with expectations
of reflation some time in 2010, we continue to believe Kroger (trading at 11.0x
2010E EPS vs. SWY, SVU, RDK at 12.0x) offers the best risk/reward in the group.
Kroger (KR) – Overweight – Dec 10 Price Target: $27.00
$22.89 $27.65 $19.39 Jan-10 $1.88 $1.90 $2.10 12.05 10.90 $14,897
28
December 2009
Retailing – Hardlines
Long Lowe’s
Christopher Horvers, CFAAC The hardlines group is at an interesting crossroads. The holiday trade thesis of
(1-212) 622-1316 owning companies that anniversary depressed sales and inventory markdowns should
christopher.horvers@jpmorgan.com be largely played out by 1Q10. Most hardlines stocks have already experienced
Jeff Wimmer, CFA trough-to-peak revaluations and have seen the initial stages of earnings beats. With
(1-212) 622-6587 the labor market likely to remain constrained until 2H10 (per J.P. Morgan
jeffrey.d.wimmer@jpmorgan.com economists), sales-driven EPS upside is more difficult to achieve, particularly given
Aaron Goldstein the need for many companies to spend more money on payroll and advertising in
(1-212) 622-1336 2010. Given that backdrop, we tend to favor larger-cap, best-in-class companies in
aaron.goldstein@jpmorgan.com
more insulated industries.
Best Idea
Advance Auto Parts, Inc. (AAP) ...................N
AutoZone, Inc. (AZO)....................................N Lowe’s at its foundation is a macro call, and encouragingly there have been positive
Bed Bath & Beyond (BBBY) .........................N moves in home sales, pricing, months supply, and other housing indicators, with the
Best Buy (BBY).............................................N hardest-hit markets showing improvement. Our economists expect housing starts to
Cabela's Inc. (CAB) .................................. UW continue to move higher in a relatively consistent manner over the next year. Same-
Dick's Sporting Goods (DKS) ...................OW
store sales are ~75% correlated to existing home sales on a lagged basis. Moreover,
Hibbett Sports, Inc. (HIBB) ...........................N
Lowe's Companies, Inc. (LOW)................OW specific to the sector, the product categories seeing the most incremental
O'Reilly Automotive (ORLY) .....................OW improvement favor LOW over HD: decorative items, appliances, and holiday
Office Depot (ODP)...................................OW merchandise. LOW has ~11% of sales in appliances (vs. ~5% for HD) and this
OfficeMax Inc. (OMX) ...................................N category just comped positively for the first time in years. We see this continuing
PetSmart, Inc. (PETM)..................................N with the $300 million cash for appliance stimulus program starting this spring and
RadioShack (RSH) .......................................N
Staples (SPLS) .............................................N
the excesses of the boom years worked off (LOW’s has 20% share of the market).
The Home Depot (HD)..............................OW LOW also has a hidden easy 4Q comparison as clearance cost LOW more than
Tractor Supply (TSCO)............................. UW 100 bps in markdowns last year—the only quarter to ever see any pressure since
Williams-Sonoma, Inc. (WSM)......................N LOW started comping negatively in 2Q06. Given how lean inventories are, they
should get back more than this level, by our estimates. However, we would not
categorize LOW as solely a holiday play, as we believe investors should position
themselves for the approaching spring selling season, home improvement’s
“Christmas.” Finally, we believe this segment is the best industry in retail—it’s a
duopoly with little Wal-Mart exposure.
Lowe’s (LOW) – Overweight – Dec 10 Price Target: $25.00

$22.58 $24.09 $13.00 Jan-10 $1.50 $1.22 $1.40 18.51 16.13 $33,238
29
December 2009
Tobacco
Pricing for Growth
Erik Bloomquist AC
U.S. market tobacco stocks outperformed the S&P 500 in 2009 despite the tax-driven
(44-20) 7325-9917 price increases of about 25-30% in a weak economic environment with rising
erik.a.bloomquist@jpmorgan.com unemployment. Volume declines of 8-9%, however, were consistent with historical
J.P. Morgan Securities Ltd. elasticity, a better-than-feared performance.
Altria Group (MO) .....................................OW In 2010, we believe the U.S. market is likely to return to underlying volume decline
British American Tobacco (BATS.L).........OW levels of 4-5%, as we see limited risk of further large-scale tax increases with only
Imperial Tobacco Group (IMT.L) ..............OW
three states currently considering further tax increases. We see little near-term
Japan Tobacco (2914) (2914.T)...............OW
Lorillard Inc (LO) ...........................................N
practical impact from FDA regulation, though the Scientific Advisory Committee
Philip Morris International (PM) ................OW could deliver its much-anticipated report on menthol toward the end of 2010.
Reynolds American (RAI) .............................N
Souza Cruz SA (CRUZ3.SA)....................OW For markets outside the United States, we expect the volume weakness evident in
Swedish Match (SWMA.ST) ..................... UW Q3 09 to persist through H1 2010, combined with trading down in some markets like
Russia. Driving this weaker volume outlook is unemployment receding only
gradually until economic recovery as forecast by J.P. Morgan Economics takes hold,
particularly in markets like Brazil, Mexico, Turkey, Russia, and South Africa. In our
view, this weakness could hold back PMI stock performance in the first part of 2010.
We are optimistic regarding U.S. cigarette industry pricing in 2010, with the
November 1% retail price increase led by Altria a portent of more cigarette price
increases, in our opinion. In smokeless, we believe convergence to one main price
point may take place over time for the top three brands (Altria’s Copenhagen and
Skoal; Reynolds Grizzly). Assuming category growth combined with market share
stability is attained by Altria’s Copenhagen and Skoal brands, we believe Altria may
take price in H2, allowing Reynolds and Swedish Match to follow.
With respect to markets outside the United States, we expect pricing to remain
robust, though with increases at a lower rate than in 2009. Increases have already
been announced in markets including France, Mexico, Russia, and in our view likely
many others like Spain, Italy, Turkey, Indonesia, and notably Japan during 2010.
Dividends should remain the primary avenue to return cash to shareholders for Altria
and Reynolds with 2010E dividend yields over 7%, while Lorillard and PMI likely
will buy back stock in addition to their 2010E dividend yields above 5%.
Best Idea
Philip Morris International (PM) is our best idea, with the most upside risk to our
current estimates for the following reasons: 1) PM is the global pricing leader in
most markets due to Marlboro; 2) Emerging Market leverage favors PM, with
25-28% of EBIT from these fast-recovering markets; 3) cost savings support EBIT
growth and innovation with gross cost savings of approximately $340m in 2010E,
equivalent to 3% of EBIT, while PM also expects additional FCF of $1bn from 2010
over three years from improved working capital management; 4) share buyback of
$4bn should reduce shares by 5% but leave 2010 Net Debt/EBITDA of only 1.3x, on
our estimates; and 5) spot FX rates imply a 6% EBIT tailwind on U.S. dollar
weakness.
Philip Morris International (PM) – Overweight – Dec 10 Price Target: $56.00

$49.17 $52.35 $32.04 Dec-09 $3.32 $3.26 $3.82 15.08 12.87 $93,653
30
December 2009
Electric Utilities & Independent Power Producers
Energy
Powering the Economy
Andrew Smith AC Macroeconomic view and electric utility implications

(1-713) 216-7681 We expect J.P. Morgan’s forecast for 3.5% average 2010 GDP growth to drive utility
andrew.l.smith@jpmorgan.com results. Utilities faced significant (for utilities) EPS pressure in 2009 as industrial
Stefka Gerova demand for electricity fell 15-25%. We expect utilities to grow 2010 EPS as
(1-212) 622-0549 economic growth drives higher power demand, which drives greater volume sales
stefka.g.gerova@jpmorgan.com and higher commodity prices. We also expect utilities to benefit from low inflation as
J.P. Morgan Securities Inc. utilities often have rate structures that do not allow passing along costs to customers
outside of a rate case cycle. Accordingly, low inflation helps protect margins.
Andrew Smith:
AGL Resources (AGL)..................................N Potential pressure for utilities could come from residential demand for electricity and
Ameren Corp (AEE).................................. UW
interest rates. J.P. Morgan’s economic outlook calls for household spending to be
American Electric Power (AEP)................OW
American Water Works (AWK) .....................N under pressure as a result of damaged household balance sheets and heightened job
CMS Energy Corp (CMS) .........................OW security concerns. Accordingly, we could continue to see some conservation efforts
Consolidated Edison (ED) ........................ UW in residential power demand. We expect the incremental impact of conservation to be
Constellation Energy Group (CEG) ............. rs modest and short-lived, however, as we believe households that have been prompted
Covanta Holding Corp. (CVA) ..................OW to conserve have already done so. Higher interest rates could also pressure utilities
Dominion Resources (D) ..............................N
because utility stocks trade inversely with Treasury yields as investors swap between
Duke Energy Corp. (DUK) ............................N
Dynegy, Inc. (DYN)...................................OW utility dividends and Treasury yields. Utilities can also be directly hurt by cost
Edison International (EIX).........................OW pressures from higher financing costs just as they can be hurt by inflation.
Entergy Corp. (ETR) .....................................N
Exelon Corp. (EXC) ......................................N We expect the improvement in industrial demand for electricity to trump potential
FPL Group Inc. (FPL) ...............................OW residential demand pressure and higher interest rate impacts.
Great Plains Energy (GXP) ..........................N
Integrys Energy Group (TEG)...................... rs 2010 sector outlook
Northeast Utilities (NU).................................N J.P. Morgan’s equity strategy outlook calls for stocks to be strong in 1H10 with gains
NRG Energy (NRG) ..................................OW moderating in 2H10. Accordingly, we expect utility stocks to underperform in 1H10
Pepco Holdings (POM)............................. UW
as investors seek higher beta. But, we expect utilities to outperform in 2H10 as
PG&E Corp. (PCG)...................................OW
Portland General Electric Co. (POR)............N investors move to protect capital and seek lower-risk investments with more stable
Progress Energy (PGN)................................N returns. We also expect the 2H10 outperformance to be boosted by easier industrial
RRI Energy, Inc (RRI)...................................N demand comparables as well as a narrowing of the valuation gap between utilities
Sempra Energy (SRE)..............................OW and the S&P 500, as utilities have underperformed the S&P 500 by almost 20% year
Southern Company (SO) ..............................N
to date.
UIL Holdings Corporation (UIL) ....................N
Vectren Corp (VVC).................................. UW
Wisconsin Energy Corp (WEC) ................OW
Best Idea
FPL Group (FPL) operates the largest U.S. wind fleet and is the leading U.S. wind
Stefka Gerova: power developer. The company also operates several nuclear power plants that are
ITC Holdings (ITC)....................................OW
NV Energy Inc. (NVE)...............................OW
attractively positioned in a world with constrained greenhouse gas emissions. We
Pinnacle West Capital Corp (PNW)..............N expect it to retain its renewable energy market leadership given its competitive
PNM Resources Inc (PNM) ..........................N advantages. It also owns a strong Florida regulated utility. FPL’s current rate case
Unisource Energy (UNS) ..............................N has turned contentious in the media; however, we do not believe the rate case is
Westar Energy Inc (WR)...............................N preordained to end badly, because even if FPL is granted all of the rate relief it has
requested (which we do not expect), rates in Florida should fall by about 9%. We
expect headlines on the rate case to be an overhang on the shares through January,
when the case is due to be resolved, but expect the stock to rally following rate case
resolution.
FPL Group (FPL) – Overweight – Dec 10 Price Target: $69.00

$52.89 $60.61 $41.48 Dec-09 $3.85 $4.10 $4.70 12.90 11.25 $21,862
31
December 2009
Oil & Gas Exploration & Production

Expecting Another Weak Natural Gas Market in 2010
Joseph Allman AC Our recent analysis on the natural gas market suggests that the gas market likely will
(1-212) 622-4864 be oversupplied again in 2010. Essentially all E&P companies on our coverage list
joseph.d.allman@jpmorgan.com expect to grow their U.S. natural gas volumes going forward. Even if the integrateds
Xin Liu and privates decrease their production, this decline probably would not be enough to
(1-212) 622-4915 balance the market. In fact, contrary to popular belief, private companies have
xin.liu@jpmorgan.com increased their rig counts from the trough July levels more so than have the public
Ronny Eisemann companies. Given the strong production and still-low demand for gas from the
(1-212) 622-6756 industrial sector, the 2010 gas market looks well oversupplied.
ronny.m.eisemann@jpmorgan.com
Anne Cameron Cold winter weather certainly could help reduce the oversupply, and the stocks might
(1-212) 622-6617 hold on until the markets reached a verdict on the winter. Further, in 2009 the E&P
anne.p.cameron@jpmorgan.com stocks have traded more with the economy, the S&P 500, and oil prices than they
J.P. Morgan Securities Inc. have with forward gas prices. Continued strength in the economy could help the
stocks stay at higher levels than the gas market would suggest.
Anadarko Petroleum (APC) ..........................N
Apache Corporation (APA) .......................OW Best Idea
Approach Resources (AREX).......................N
Brigham Exploration Company (BEXP)....OW We expect Apache’s production growth in 2010 to be around 15%, driven by first
Cabot Oil & Gas (COG) ............................OW production from two new fields in Australia (Van Gogh and Pyrenees) and a full year
Carrizo Oil & Gas Inc. (CRZO) .....................N of higher production in Egypt.
Chesapeake Energy (CHK) ......................OW
Concho Resources, Inc. (CXO) ................OW Apache’s 50% oil weighting and good cost controls help it to achieve superior
Continental Resources, Inc. (CLR)...............N margins compared with its peers. Given our expectation for a weak 2010 gas market,
Delta Petroleum Corporation (DPTR)....... UW companies with more oil and low costs likely will outperform.
Denbury Resources Inc. (DNR)................... rs
Devon Energy (DVN) ................................OW Using NYMEX futures, APA is trading around 80% of NAV, a discount to its large-
El Paso Corp. (EP) ...................................OW
Encore Acquisition Company (EAC) ........... rs
cap peers and the overall group.
EOG Resources, Inc. (EOG) ....................OW
Apache Corporation (APA) – Overweight – Dec 10 Price Target: $117.50
EQT Corporation (EQT)............................OW
EXCO Resources, Inc. (XCO) ......................N Price 52-wk range FY EPS P/E Mkt Cap
Goodrich Petroleum (GDP) ......................OW 12/01/2009 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Mariner Energy, Inc. (ME) ........................OW $97.72 $105.59 $51.03 Dec-09 $12.20 $5.31 $9.46 18.40 10.33 $32,851
McMoRan Exploration Company (MMR)..OW
Newfield Exploration Company (NFX)......OW
Noble Energy (NBL)..................................OW
Penn Virginia Corporation (PVA)..............OW
Petrohawk Energy (HK)............................OW
Petroleum Development Corporation (PETD) ..N
PetroQuest Energy, Inc. (PQ)...................OW
Pioneer Natural Resources (PXD)............OW
Plains Exploration & Production (PXP) ....OW
Questar Corp. (STR).................................OW
Quicksilver Resources Inc (KWK) ................N
Range Resources Corp (RRC).................OW
SandRidge Energy Inc. (SD) ........................N
Southwestern Energy Company (SWN)...OW
St. Mary Land & Exploration (SM)................N
Swift Energy Company (SFY).......................N
Ultra Petroleum Corp (UPL) .........................N
Venoco, Inc. (VQ) ..................................... UW
Whiting Petroleum Corporation (WLL) .........N
Williams Companies (WMB).....................OW
XTO Energy (XTO) ...................................OW
32
December 2009
Banks – Large Cap
Financials
Attractive Valuations; Slow Recovery in Fundamentals, But Visibility to Improve Over the Year
Vivek Juneja AC We expect bank stocks to rise slowly as fundamentals gradually improve and
(1-212) 622-6465 visibility, especially on credit losses, becomes clearer. Political/regulatory
vivek.juneja@jpmorgan.com concerns likely will maintain some choppiness, but these concerns should abate as
Thomas W. Curcuruto the economy improves. Weaker-quality regional banks will likely continue to lose
(1-212) 622-5158 money, but flight-to-quality banks should gain further share and make money. Due to
thomas.w.curcuruto@jpmorgan.com the uncertainty, all bank stocks have recently pulled back, and therefore we expect
Polly P. Sung, CFA further significant upside in the sector over a two-year period based on normalized
(1-212) 622-0551 earnings. We prefer flight-to-quality banks (WFC, BBT, and USB) over weaker
polly.p.sung@jpmorgan.com
regional banks as the flight-to-quality banks provide as much or more upside
J.P. Morgan Securities Inc. potential, but with lower risk, by our estimates. We also like large universal banks
(BAC and C), which should benefit from markets-related businesses and from global
Bank of America (BAC).............................OW
growth, and are also attractively valued and provide good upside potential, in our
Bank of New York Mellon Corp. (BK) .......OW
BB&T Corporation (BBT) ..............................N view. Weaker regionals have a longer credit risk tail due to commercial real estate
Citigroup Inc. (C).......................................OW exposure. Among flight-to-quality banks, those that have repaid TARP should have
Fifth Third Bancorp (FITB)........................ UW additional upside through increasing dividends.
Northern Trust (NTRS) .................................N
Regions Financial (RF).................................N We expect a tentative economic recovery to drive slow progress in bank
State Street (STT).........................................N fundamentals. The market will remain focused on recovery to normalized earnings,
SunTrust Banks, Inc. (STI) ...........................N and second-half 2010 should provide better earnings visibility as credit losses abate.
U.S. Bancorp (USB)......................................N Given very high unemployment and further commercial weakness, credit losses are
Wells Fargo (WFC) ...................................OW
likely to continue to rise near term, peak in mid-2010, and improve modestly in
2H10. There may be some loan loss reserve releases depending on accounting/
regulatory guidance. Revenue trends will likely be mixed with weak net interest
income growth and mixed fee income trends. Net interest income is likely to be hurt
by pressure on loans (weak demand, runoff of high-risk loans). Fee income is likely
to be marked by a benefit to markets-related businesses, but also pressure on deposit
service fees, credit card fees (political/regulatory changes), and mortgage banking
income (lower refi).
Trust and processors: attractive valuations, but some headwinds. Trust banks
have been defensive stocks, but earnings are pressured by a drop in revenues from
sources that are likely to stay low and are also generally higher-margin businesses:
FX, securities lending, and net interest income. Markets recovery and secular growth
should benefit core asset servicing and asset management businesses. Valuation has
become attractive, but we think there is greater upside potential in traditional banks
as credit improves. STT and BK may be able to offset some pressure by benefiting
from industry consolidation, especially in Europe. Share buybacks would add to EPS
longer term—major buybacks are unlikely near term.
Best Idea
We recommend Bank of America (BAC) due to its attractive valuation based on
normalized earnings and repayment of TARP. Earnings are pressured by elevated
credit losses near term, but these should start to decline in ’10 and drive a recovery in
earnings. In addition, BAC should benefit from improved markets. Management
turmoil should be settled soon. Capital raised to repay TARP dilutes normalized EPS
by an estimated 4% in worst case scenario, depending on level of asset sales. BAC
trades at 1.4x tangible book (in line with peer median) and 5.9x normalized earnings.
Bank of America (BAC) – Overweight – Dec 10 Price Target: $21.50
$15.90 $19.10 $2.53 Dec-09 $0.55 $0.39 $0.80 40.77 19.88 $137,547
33
December 2009
Banks – Mid-Cap
Position Portfolios to Profit from Bank Failures
Steven Alexopoulos, CFA AC The pool of potential bank failures has ballooned; on pace for 200 failures in
(1-212) 622-6041 2010. Although there may be a glimmer of hope that the worst of the downward
steven.a.alexopoulos@jpmorgan.com pressure on the U.S. economy has passed, the pipeline of potential bank failures
Preeti S. Dixit continues to swell as many small and mid-sized banks with limited access to fresh
(1-212) 622-9864 capital continue to struggle working through toxic construction and development
preeti.s.dixit@jpmorgan.com loan portfolios, particularly those originated in highly stressed real estate markets
Renee H. Park such as Florida, Georgia, Illinois, Arizona, and Nevada. In the most recent quarter,
(1-212) 622-6718 the number of institutions reported on the FDIC “problem list” increased to 552 from
renee.h.park@jpmorgan.com
416 in 2Q09, and 171 in 3Q08. Assets of institutions on the problem list in 3Q09 had
J.P. Morgan Securities Inc. increased to $346 billion, up $46 billion from 2Q09, and up $230 billion from 3Q08.
Both the number of and total assets of problem institutions now stand at the highest
BancorpSouth (BXS) ....................................N
City National Corp (CYN) .........................OW level since the end of 1993. With 130 failures reported year to date, the pace of
Comerica Incorporated (CMA)..................OW quarterly failures picked up from 21 reported in 1Q09 to 24 in 2Q09, to 50 in 3Q09.
Cullen/Frost Bankers Inc. (CFR) ..............OW With the continued sharp pickup in the number of banks on the “problem” list, we
First Horizon National (FHN) ........................N expect the 3Q09 run rate of about 50 failures to approximate the quarterly pace
FirstMerit Corporation (FMER) .................OW through 2010, resulting in about 200 failures in 2010.
M&T Bank (MTB) ..........................................N
Marshall & Ilsley Corporation (MI) ................N Position to profit from bank failures. We believe that the rise in bank failures
MB Financial (MBFI) .................................OW
opens the door to among the greatest returns the stronger banks can expect to receive
People's United Financial (PBCT) ............OW
PrivateBancorp, Inc. (PVTB) ........................N on invested capital—by purchasing assets in FDIC-assisted transactions. From a
Signature Bank (SBNY)................................N shareholder perspective, increased failures afford stronger banks the opportunity to
Susquehanna Bancshares (SUSQ).......... UW boost near-term earnings, improve risk profiles from both liquidity as well as credit
SVB Financial (SIVB)....................................N perspectives, and perhaps increase the long-term growth potential of the acquiring
Synovus Financial Corp. (SNV)....................N banks. A key tenet of this strategy, however, is that the acquired FDIC assets must be
TCF Financial Corporation (TCB)............. UW
Trustmark Corporation (TRMK) ....................N
substantial enough to move the needle for the acquiring bank, which generally
Valley National Bancorp (VLY) .....................N implies that this theme is best leveraged with the small-cap banks. The most recent
Webster Financial Corporation (WBS) .........N example of strong performance would be East West, which rallied 50% following
Whitney Holding Corp. (WTNY)....................N news of it acquiring UCBH in an FDIC-assisted transaction. With now over 550
Zions Bancorporation (ZION) .......................N banks on the FDIC potential problem list in 3Q, this implies to us a wide opportunity
for stronger banks to acquire assets very profitably from the FDIC.
Number of Institutions on FDIC’s
“Problem List”
Best Idea
3Q09 552
2Q09 416 At the top of our list of banks best positioned to take advantage of FDIC
1Q09 305 opportunities is FirstMerit (FMER), given strong capital levels, a relatively clean
4Q08 252
balance sheet, a high-quality senior management team, and recent entry into
3Q08 171
2Q08 117
Chicago—a market loaded with weak banks, based on 21 institutions with a Texas
1Q08 90 ratio north of 100% in Illinois as of 3Q09. MBFI is also positioned to bolt on FDIC
4Q07 76 deals following the three completed year to date, and PBCT is solidly positioned
3Q07 65 given capital levels. Given many struggling banks in southeast markets such as
2Q07 61
1Q07 53
Florida and Georgia, banks that we believe could profit from failures include BXS,
4Q06 50 WTNY, FHN, and TRMK, with each bank successfully navigating a tough market.
3Q06 47
2Q06 50 FirstMerit (FMER) – Overweight – Dec 10 Price Target: $23.00
1Q06 48
0 200 400 600 12/01/2009 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Source: FDIC Quarterly Banking Profile. $20.93 $21.99 $12.27 Dec-09 $1.48 $1.01 $1.40 20.72 14.95 $1,797
34
December 2009
Brokers, Asset Managers & Exchanges

Asset Managers Better in 1H10 with Exchanges More Stable in 2H10
Kenneth B. Worthington, CFA AC In an environment that favors high-beta names, asset managers should outperform.
(1-212) 622-6613 Market appreciation leads directly to a higher AUM base and thus higher revenues
kenneth.b.worthington@jpmorgan.com (with operating leverage) at the asset managers. While we expect that additional
Funda Akarsu savings could go into bank products as opposed to investment products and that a
(1-212) 622-5319 weak jobs outlook could provide for a slower-than-historical rate of fund flows
funda.m.akarsu@jpmorgan.com recovery, market appreciation should more than offset these risks in an environment
Timothy Shea that favors high-beta stocks. We favor the asset managers in 1H10 but see the upside
(1-212) 622-5707 ending by midyear given expectations for weaker markets in the second half.
timothy.j.shea@jpmorgan.com
J.P. Morgan Securities Inc. Deleveraging is likely finished given the context of a recovery, and we could start to
see re-leveraging in financial markets. Given the extent of the downturn, this could
BM&F Bovespa (BVMF3.SA) .......................N be slower than in past recoveries, but should help both the traditional exchanges and
CME Group Inc. (CME).................................N alternative execution venues through increased trading volumes. We also see the
Eaton Vance Corp (EV) ............................ UW
possibility that expectations of higher rates could start to positively impact trading
Evercore Partners Inc. (EVR) .......................N
Federated Investors, Inc. (FII) .................. UW volumes in 2H10. Given expectations for weaker markets in 2H10 and potentially
Franklin Resources (BEN)........................OW higher trading volumes, we think that the exchanges space will hold up better in
Invesco Ltd. (IVZ) .....................................OW 2H10 than the asset managers.
Investment Technology Group (ITG)............N
Janus Capital Group (JNS)...........................N Best Idea
Knight Capital Group (NITE).........................N
MF Global (MF).........................................OW Our top pick is Franklin Resources (BEN). We are still seeing strong sales and
NYSE Euronext (NYX)..................................N performance at Franklin and see even more upside potential in sales as reallocations
Och-Ziff Capital Management (OZM) .......OW or new investments take place after the New Year. In addition, with markets
Penson Worldwide (PNSN) ......................... rs expected to do well in 1H10, we like the beta exposure. It also helps that Franklin has
Pzena Investment Management (PZN) ........N
a large international presence, and in a weak U.S. dollar environment, this provides a
T. Rowe Price Group, Inc (TROW)...............N
The Intercontinental Exchange (ICE) .......OW tailwind to earnings.
Franklin Resources (BEN) – Overweight – Dec 10 Price Target: $143.00

$108.40 $116.39 $37.11 Sep-10 $3.88 $6.40 $7.50 16.94 14.45 $24,851
35
December 2009
Insurance – Life
Fundamentals Weak But Improving; Significant Upside Potential in Select Stocks
Jimmy S. Bhullar, CFA AC Life insurance operating fundamentals remain challenging, but the industry appears
(1-212) 622-6397 adequately capitalized, and we expect sales/flows to improve as the economy
jimmy.s.bhullar@jpmorgan.com recovers. We foresee upside for the sector in 2010 driven by multiple expansion and
Erik J. Bass, CFA modest book value growth. Rising commercial real estate losses are our key concern.
(1-212) 622-2295
erik.bass@jpmorgan.com We expect earnings and ROEs to continue to recover. The rebound in the equity
J.P. Morgan Securities Inc. market has boosted AUM and fee income and reduced DAC expense. In addition,
lower market volatility has reduced hedging costs. Insurers should also begin to see
AFLAC, Inc. (AFL) ........................................N the benefit of price increases that were implemented over the past year (notably on
American International Group (AIG)............ rs VAs and individual life). In addition, we expect investment income to improve as
Assurant, Inc. (AIZ)...................................OW
companies invest excess liquidity and variable investment returns begin to normalize.
Conseco, Inc. (CNO) ....................................N
Genworth Financial, Inc. (GNW)...................N
Our sales outlook remains muted, but growth should improve in 2010. While we
Hartford Financial Services (HIG).............OW
Lincoln National (LNC)..................................N
expect production to remain below historical levels for most products, sales should
MetLife, Inc. (MET) ...................................OW begin to rise on a sequential basis. Year-over-year growth is also likely to accelerate
National Financial Partners (NFP)................N given easy comparisons. We project individual life insurance and variable annuities
Phoenix Companies (PNX)....................... UW to see the biggest rebound, while group life, group disability, and retirement/401(k)
Principal Financial Group (PFG)............... UW sales should remain lackluster until unemployment declines. Fixed annuity sales will
Protective Life (PL) .......................................N
likely be pressured by a less favorable interest rate environment.
Prudential Financial (PRU) .......................OW
Reinsurance Group of America (RGA).....OW
Book value growth expected to be modest given elevated investment losses. Over
Torchmark Corp (TMK).................................N
Unum Group (UNM)......................................N
the past year, a key investment theme for the life insurance group was book value
expansion as credit spreads narrowed. We believe this trend has played out as
spreads have returned to historical levels and long-term interest rates seem unlikely
to materially decline. In 2010, we are projecting modest book value growth for the
industry as net income is likely to be pressured by investment impairments. While
RMBS and corporate defaults should decline from 2009 levels, we anticipate an
increase in commercial real estate losses (for both CMBS and whole loans).
Valuations appear attractive. Based on our view that the life insurance sector can
earn a 10-12% ROE over time, we believe the group’s normalized P/BV multiple
should be in the 1.1-1.3x range. The life group is currently trading at 0.9x book value
(ex. AOCI), so we see room for multiples to expand as fundamentals improve.
Best Idea
In our view, Prudential Financial’s business mix should enable it to earn superior
returns and generate above-average EPS growth over time. The company also has
one of the strongest capital positions in the group, which gives it the flexibility to
absorb investment losses and pursue opportunistic M&A. Given its higher ROE
potential, PRU should trade at a premium to the life group, in our view. The stock is
currently trading at 1.0x book value (ex. AOCI) compared with the group at 0.9x.
Our $60 year-end 2010 price target is derived using a P/BV multiple of 1.2x and
implies greater than 20% upside from current levels. For investors with a more
cautious macro view, we favor RGA (Overweight, $57 Dec 10 price target).
Prudential Financial (PRU) – Overweight – Dec 10 Price Target: $60.00

$49.73 $55.99 $10.63 Dec-09 $3.39 $5.72 $5.57 8.69 8.93 $23,075
36
December 2009
Insurance – Non-Life
Company-Specific Fundamentals Likely to Matter More than Macro Themes
Matthew G. Heimermann AC The non-life sector traditionally does not have much leverage to the broader
(1-212) 622-6545 economy. Rather, the economy’s importance is its influence on asset prices and
matthew.g.heimermann@jpmorgan.com interest rates. Economic activity does affect exposures (the value of the economy
Keith Alexander being insured), but exposure growth tends to lag economic activity. However, growth
(1-212) 622-2984 in exposures would not necessarily be profit-enhancing given current industry pricing
keith.x.alexander@jpmorgan.com trends. As a result, our economists’ macro view is mostly neutral for our coverage
J.P. Morgan Securities Inc. group over the next twelve months. There are some exceptions, but industry
fundamentals should matter more than macro factors in most cases.
ACE Limited (ACE) ...................................OW
Allied World Assurance Company Holdings (AWH)..N We believe stock price performance within the non-life sector should become
Allstate Corp. (ALL) .................................. UW
increasingly tied to fundamentals as we move through 2010, given that
Aon Corporation (AOC) ................................N
Arch Capital Group, Ltd. (ACGL)..................N improvements in the macroeconomic outlook should dampen the effect of broad
Axis Capital Holdings, Ltd. (AXS).................N market themes. The biggest differentiator between companies going forward, in our
Brown & Brown, Inc (BRO)...........................N view, will be the sustainability of operating returns. Despite an industry fundamental
Chubb Corp. (CB) ..................................... UW backdrop that can best be described as mediocre, the outlook for individual stocks is
Endurance Specialty Holdings (ENH) ......OW surprisingly varied due to differences in risk portfolios.
Everest Re Group, Ltd. (RE) ....................OW
First Mercury Financial Corporation (FMR)..N If there is one area in which we hope our economists are wrong, it is the direction of
Marsh & McLennan Cos., Inc. (MMC) ..........N
short-term rates. A consequence of the current low interest rate environment is that
Montpelier Re Holdings, Ltd. (MRH) ............N
PartnerRe Ltd. (PRE)................................OW operating returns for the industry are understated by as much as 150 bps. Another
Platinum Underwriter Holdings, Ltd. (PTP) ..N contributing factor to falling yields has been an ultra-conservative investment posture
The Progressive Corp. (PGR) .................. UW by the industry over the past 12-18 months. While we would like higher short-term
Transatlantic Holdings (TRH) .......................N yields, we hope our economists are correct with respect to broader inflation trends,
Travelers (TRV) ............................................N which would soften the interest rate impact on asset prices and book value.
Validus Holdings (VR)...................................N
Willis Group Holdings Limited (WSH)...........N In terms of sector exposure, we are most focused on the sectors with above-average
XL Capital Ltd. (XL) ......................................N
return prospects. Specifically, we favor the reinsurance sector, because pricing trends
over the past 12 months have helped relative margin prospects, and selective areas of
commercial lines. Reinsurance is also the most levered to higher short-term interest
rate levels. If the economy gains strength as 2010 progresses, it could improve the
relative prospects of the insurance brokerage and personal insurance sectors,
although we believe these sectors will not see a real benefit until 2011.
Best Idea
We believe that ACE Limited (ACE) is perhaps the best way to take advantage of
J.P. Morgan’s constructive view on the economy and markets as well as our industry
themes. With respect to the economy, the company’s large accident & health, crop
insurance, and international life businesses are positively levered to global economic
growth. This creates a countercyclical product growth story for the company. In
addition to the 35% of ACE’s insurance portfolio that is non-traditional, another
30-35% of the portfolio has experienced better pricing over the past 12 months. The
company’s portfolio stands in stark contrast those of many of its peers, which are
more levered to product areas where weakening pricing power has been the norm.
ACE Limited (ACE) – Overweight – Dec 10 Price Target: $73.00

$49.82 $55.14 $31.84 Dec-09 $7.72 $8.09 $7.75 6.16 6.43 $16,753
37
December 2009
REITs/Real Estate Services

More Constructive on REITs, But Need to Look at Service Companies to Keep Up with S&P
Anthony Paolone AC We are more constructive on REITs going into 2010 compared to 2009. But that
(1-212) 622-6682 said, we think it could be more challenging for the stocks to outperform the broader
anthony.paolone@jpmorgan.com U.S. equity market given J.P. Morgan’s bullish macro view and expectation that
Michael W. Mueller AC
earnings can rebound for much of the S&P, something REIT earnings cannot do.
(1-212) 622-6689
michael.w.mueller@jpmorgan.com Stepping back, we think REIT capital access has been the single biggest game-
J.P. Morgan Securities Inc. changer in the last few quarters. The equity markets, unsecured bond spreads, and
convertible debenture terms are all working in favor of these companies, and the
Anthony Paolone: resulting reduction in entity-level risk is clearly a good thing for the stocks.
AIMCO (AIV)............................................. UW
Alexandria Real Estate Equities (ARE) ........N We also see two additional positive elements to the REIT story. First, yield investors
American Campus Communities (ACC).......N
returning could help the stocks. Many income investors exited the group over the last
AvalonBay Communities (AVB)....................N
Boston Properties (BXP) ..........................OW 18 months as nearly two-thirds of companies cut dividends by about two-thirds. With
Brandywine Realty Trust (BDN) ...............OW cuts largely done, these investors can take more comfort that the stated yields are
Brookfield Properties (BPO) ..................... UW relatively secure and likely to grow in the coming years. Second, REITs are
Camden Property Trust (CPT).................. UW competitively positioned to make accretive acquisitions. The commercial real estate
CB Richard Ellis Group, Inc. (CBG) .........OW transaction market remains quiet and distress continues to be put off, but we no less
Douglas Emmett, Inc. (DEI)......................OW
Education Realty Trust (EDR) .................. UW
expect some uptick in deal flow that should help REITs grow in the next few years.
Entertainment Properties Trust (EPR)......OW
A major concern of ours is that the group’s high correlation and high beta to the
Equity Residential (EQR)..............................N
Essex Property Trust (ESS) .....................OW broader market has allowed it to do well, but we worry that these technical dynamics
Lexington Realty Trust (LXP) .......................N could revert back to their historical norms (low correlation/beta) if investors focus on
Liberty Property Trust (LRY).........................N valuation and growth. Cash flow multiples have quickly moved back up to above-
Mission West Properties (MSW)............... UW average levels (about 18-19x 2010E AFFO) and there is unlikely to be any notable
Post Properties (PPS)............................... UW rebound to core earnings growth until 2011/2012; 2010 earnings growth should be
Realty Income (O).........................................N
SL Green Realty Corp. (SLG).......................N
negative for the third year in a row. Lagging real estate fundamentals, dilution from
UDR, Inc. (UDR) ...........................................N equity issuances, and the rolling of debt at higher rates likely will keep a lid on
Vornado Realty Trust (VNO) ........................N earnings growth. In this regard, REITs may pale in comparison to the broader equity
Washington Real Estate Investment Trust (WRE).N market in the next couple of years.
Michael W. Mueller: We see a better opportunity to keep up with the broader market in real estate
Acadia Realty Trust (AKR) ...........................N services, where cost cuts and near-real-time reaction to changes in the economy and
AMB Property Corporation (AMB) ................N
real estate business should drive a faster and more robust earnings recovery.
CBL & Associates Properties (CBL).............N
DCT Industrial Trust (DCT)...........................N
Developers Diversified Realty (DDR) ...........N
Best Idea
Equity One Inc. (EQY) .............................. UW We think CB Richard Ellis (CBG) presents a very favorable multi-year risk/reward
Federal Realty Investment Trust (FRT)....OW opportunity for investors. CBG should benefit far more (and far more quickly) from a
HCP, Inc. (HCP) ...........................................N
Healthcare Realty Trust (HR) .......................N
cyclical recovery in the commercial real estate sector than REITs. We think the
Jones Lang LaSalle Inc (JLL) .......................N investment sales division should post strong y/y growth in 2010. The leasing
Kimco Realty Corporation (KIM)...................N business may not begin to see an upturn until 2011, but we think it will also show
Macerich (MAC)........................................OW some signs of stabilization in 2010, particularly in Asia. The company is also poised
Medical Properties Trust (MPW) .............. UW to benefit in any number of ways from distressed real estate sales/workouts, etc., by
Nationwide Health Properties (NHP)........OW
gaining opportunities to sell, lease, and/or manage distressed commercial real estate
Pennsylvania REIT (PEI).......................... UW
ProLogis (PLD) .............................................N assets. We still believe the company can reach a normalized EPS level of $1.00-1.50
PS Business Parks (PSB) ............................N in the 2012/2013 timeframe, and the company traded as high as 20x in the last peak.
Public Storage (PSA)....................................N As such, valuation looks reasonable, in our view.
Regency Centers (REG)...............................N
Simon Property Group (SPG)...................OW CB Richard Ellis Group (CBG) – Overweight – Dec 10 Price Target: $13.00
Tanger Factory Outlet Centers (SKT) ......OW Price 52-wk range FY EPS P/E Mkt Cap
Taubman Centers (TCO)..............................N 12/01/2009 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Weingarten Realty Investors (WRI)..............N
11.59 $13.77 $2.34 Dec-09 $0.83 $0.27 $0.37 42.93 31.32 $3,394
38
December 2009
Specialty & Consumer Finance

Persistently High Unemployment and Growing Savings Rate Should Lead to Prolonged Asset
Shrinkage at Most Consumer Lenders—Remain Broadly Cautious on Sector
Andrew Wessel AC
We believe the majority of the consumer finance space will be laggards to the
(1-212) 622-8051
andrew.n.wessel@jpmorgan.com
broader market in 2010. Based on the outlook for a 9% or higher unemployment rate
over the next two years, and a personal savings rate steadily growing to 4% by the
Daniel Kim
end of 2011, we believe consumer lenders will see prolonged balance sheet
(1-212) 622-6557
daniel.x.kim@jpmorgan.com
contraction, thereby stifling earnings growth after credit costs normalize. As such, we
remain cautious on our group next year.
Ashley Hanna-Holloway
(1-212) 622-1505 In the credit card group, we think Capital One (COF) is best positioned to succeed
ashley.hanna-holloway@jpmorgan.com
given our outlook, as it has the ability to grow its traditional bank business through
J.P. Morgan Securities Inc. commercial lending, helping to offset forecasted asset shrinkage in its consumer card
segment. Trading at just 8x our normalized estimate, shares offer value near term, in
Ambac Financial Group (ABK) ................. UW
American Capital, Ltd. (ACAS) ................. UW
our view. American Express (AXP) continues to reduce its lending operation,
American Express (AXP)..............................N choosing to refocus on its network business by growing its charge card model to
Annaly Capital Management (NLY)..........OW consumers and businesses alike. Given our dim view of consumer spending trends
Apollo Commercial Real Estate Finance (ARI) ...N and higher savings rate in 2010, we expect earnings growth will be challenged aside
Apollo Investment Corporation (AINV) .........N from one-time benefits on the expected release of loss reserves. We believe Discover
Ares Capital Corporation (ARCC)................ rs
(DFS) will be a relative underperformer in the group next year, as it has not created a
Assured Guaranty Ltd. (AGO) ..................OW
Astoria Financial (AF) ...................................N material revenue source aside from its card lending business. The network is still in a
BlackRock Kelso Capital (BKCC) .................N growth phase, creating an expense drag. In addition, its alternate loan channels, such
Capital One (COF)........................................N as private student loans, are still too small to drive meaningful earnings growth.
CapitalSource (CSE) ................................... rs
Chimera Investment (CIM) ...........................N Best Idea
Discover Financial Services (DFS)...............N
Fidelity National Financial (FNF) ..................N Our favorite idea for 2010 is Assured Guaranty (AGO), a $3.5bn market cap
MBIA Inc. (MBI) ........................................ UW company that is the only bond insurer left writing business today. Based on our
MFA Financial, Inc. (MFA)........................OW bottom-up MBS portfolio analysis published in August, we model that AGO will
Nelnet, Inc (NNI) .......................................OW need to reserve another $400m for losses in coming quarters. After accounting for
New York Community Bank (NYB)...............N
these reserve additions and the dilution from the recent capital raise to affirm its Aa3
Redwood Trust (RWT)..................................N
SLM Corp. (SLM)......................................OW rating with Moody’s, we estimate AGO will earn $4.37 per share in 2010 and $5.37
in 2011. Given AGO’s dominant position in the municipal bond insurance business,
its highly visible revenue outlook, and the well-seasoned nature of its most distressed
credits (primarily mortgage-related), we believe shares should be valued at more than
just 5x our 2010 earnings estimate, where they currently trade. We have set a
year-end 2010 price target of $37, which values AGO shares at just 7x our 2011
estimate, compared to its historical 10-12x multiple.
There are three potential catalysts for AGO as we head into next year, with the most
immediate 4Q earnings, expected in February. Our operating EPS estimate of $1.05
is well above the current consensus of $0.79. We model losses will remain elevated
at $100m, but scheduled premium revenues and investment income of ~$430m will
drive a significant earnings beat. AGO may also announce a global settlement with
one or more of the seller/servicers of MBS transactions it has insured, where many
loans did not meet contractual terms. Finally, a portfolio-level reinsurance
transaction could materialize from one of AGO’s financially strapped peers.
Assured Guaranty (AGO) – Overweight – Dec 10 Price Target: $37.00

$21.89 $28.14 $2.69 Dec-09 $0.84 $2.74 $4.37 7.99 5.01 $3,428
39
December 2009
40
December 2009
Biotechnology
Health Care
Sector Recovery Expected in 2010; Pipeline and Catalysts Remain Key to Outperformance
Geoff Meacham, Ph.D. AC We are modestly more bullish overall on the biotech group looking to 2010. In our
(1-212) 622-6531 view, outperformance should be driven much more by value-creating catalysts and
geoffrey.c.meacham@jpmorgan.com pipeline breadth and depth, and less by upside to consensus forecasts. As a result, we
Matt Roden, Ph.D. have a bias toward small/mid-cap biotech over large caps, and overall we think that
(1-212) 622-2327 2010 will be a critical year for stock-picking.
matthew.m.roden@jpmorgan.com
Terry Coyne In 2010, we expect the group will see inflows driven by dissipation of the healthcare
(1-212) 622-5256 reform overhang and a winding down of the early-cycle economic recovery trade.
terrance.p.coyne@jpmorgan.com
Fundamentals of the biotech group are strong on an absolute basis and relative to
other sectors within healthcare. That said, the growth profile of large-cap biotech
Geoff Meacham: shows maturation coupled with Phase 3 pipelines that lack blockbuster replacements.
Acorda Therapeutics Inc. (ACOR)............OW
Amgen Inc (AMGN) ..................................OW We expect several high-profile clinical catalysts in 2010, including Phase 3 data for
Amicus Therapeutics (FOLD) .......................N Amgen’s denosumab in prostate cancer and prevention of bone metastases, Vertex’s
Biogen Idec (BIIB).........................................N telaprevir in HCV, Medivation’s dimebon in Alzheimer’s disease, and Celgene’s
Celgene (CELG) .......................................OW Revlimid in maintenance multiple myeloma. Key regulatory decisions are expected
Genzyme Corporation (GENZ) .....................N
in 2010 for Amgen’s denosumab, Genzyme’s Lumizyme, and Acorda’s Fampridine.
Gilead Sciences (GILD)............................OW
Medivation (MDVN) ..................................OW
M&A should continue to be a theme for the group in 2010, much more so than in
Myriad Genetics Inc. (MYGN)...................OW
OSI Pharmaceuticals (OSIP)....................OW 2009. We see increasing M&A and licensing activity by Big Pharma as well as Big
PDL BioPharma (PDLI).................................N Biotech to augment pipelines and in an effort to expand multiples that are now at
United Therapeutics (UTHR) ........................N multi-year lows.
Vertex Pharmaceuticals (VRTX)...............OW
Capital markets activity should sustain momentum going in 2010 coupled with
significantly more IPO activity compared to the past five years. This should actually
Matt Roden:
AMAG Pharmaceuticals (AMAG) .............OW
be a positive for the biotech group as it is likely to enhance perception of the
industry’s pipeline and is a reminder of the strong risk/reward profiles often seen in
small/mid-cap biotech.
Best Idea
Celgene (CELG) is our best idea in biotech for 2010. We think that CELG shares
are poised for a strong 2010 largely based on our bullish view of lead value-driver
Revlimid. We see significant upside potential to our 2010 Revlimid forecast of
$2.11bn (+26% y/y) driven by increasing share in the U.S. in multiple myeloma, a
full year of sales from recent launches in the UK, Canada, and Australia, plus
expected launches in Turkey and Japan. Catalyst-wise, Celgene should sustain the
momentum from recent data for MM-015, which should drive FDA approval in first-
line MM (2010E) and EMEA approval in 2011E. We see significant optionality from
the maintenance MM opportunity for Revlimid based on the IFM 2005-02 trial
(interim analysis in 1Q 2010E) and CALGB trial (interim data potentially in 2H
2010E).
Celgene (CELG) – Overweight – Dec 10 Price Target: $65.00

$56.30 $58.31 $36.90 Dec-09 $1.55 $2.00 $2.50 28.15 22.52 $25,876
41
December 2009
SMid Biotechnology
SMid Biotechs Could Further Benefit If a Beta Rally Persists
Cory Kasimov AC Going into 2010, we have a relatively optimistic outlook for the small/mid-cap
(1-212) 622-5266 biotech group. SMid biotechs are not as reliant as most industries on the performance
cory.w.kasimov @jpmorgan.com of the overall economy so long as there is access to capital. Indeed, to date in 2009,
Mona Ashiya, Ph.D. the Nasdaq Biotechnology Index (NBI) has outperformed the broader market
(1-212) 622-5711 (NBI +37% vs. S&P 500 +20%) amid a much improved financing environment.
mona.x.ashiya@jpmorgan.com Moreover, the group could benefit if U.S. Equity Strategist Tom Lee’s expectation
J.P. Morgan Securities Inc. for higher-beta outperformance in 1H10 is realized. With that backdrop, we still
expect investor risk appetite for the SMid biotechs to continue to be driven by M&A
Alkermes, Inc. (ALKS) ..............................OW
activity and high-profile clinical and regulatory catalysts. Lastly, should final
Amylin Pharmaceuticals (AMLN)..................N
Arena Pharmaceuticals, Inc. (ARNA) ...........N resolution of the healthcare reform debate finally prompt a reversion to a more
Ariad Pharmaceuticals (ARIA)..................OW standard weighting of the overall healthcare sector, there could potentially be a
Array BioPharma (ARRY).........................OW positive trickle-down effect for SMid biotechs.
Biodel Inc. (BIOD).....................................OW
Emergent BioSolutions (EBS) ..................OW Best Idea
Exelixis, Inc (EXEL) ......................................N
Human Genome Sciences (HGSI) ...........OW We are sticking with our favorite idea from 2H09. Notwithstanding Incyte’s year-to-
Incyte Corporation (INCY) ........................OW date outperformance (+112% vs. S&P 500 +20%), we see room for further upside in
MannKind Corporation (MNKD)................ UW 2010. Our bullish outlook arises from our conviction in a positive 2H10E outcome
Nektar Therapeutics (NKTR) ....................OW from the pivotal Phase 3 COMFORT-1 trial of INCB18424 (’424), Incyte’s lead
Onyx Pharmaceuticals (ONXX) ................OW
product candidate for myeloproliferative disorders (MPDs). Our confidence was
Orexigen Therapeutics (OREX)................OW
Seattle Genetics (SGEN)..........................OW recently bolstered by the impressive partnership announced November 24 with
The Medicines Company (MDCO) ...............N Novartis ($210m cash upfront and up to $1.1bn in milestones but all U.S. rights
VIVUS, Inc (VVUS) ...................................OW retained). Indeed, data presented to date in both myelofibrosis and the polycythemia
vera (PV) and essential thrombocytopenia (ET) indications show durable spleen
reductions as well as marked improvements in quality of life. Partnerships for other
valuable assets such as INCB28050, a Jak inhibitor currently in a Phase 2 trial for
rheumatoid arthritis (RA, data 2010E) and a post-Phase 2 diabetes asset
(INCB13739, 11betaHSD1 inhibitor) could provide additional upside in 2010. All in,
we believe INCY’s current EV of ~$920m is attractive based on our probability-
adjusted sum-of-the-parts and rNPV analyses. We reiterate our Overweight rating.
Incyte (INCY) – Overweight – Dec 10 Price Target: $13.00

$8.40 $8.64 $1.96 Dec-09 ($1.99) ($1.63) ($1.20) N/M N/M $996
42
December 2009
Healthcare Facilities
Uncompensated Care Weighs as a Factor, With Operating Cost Savings Reset
John Rex AC The acute care stocks are coming off strong performance in 2009, with the group up
(1-212) 622-6600 roughly 120% for the year. The appreciation largely occurred in two stages. Earlier
john.rex@jpmorgan.com in the year, the heavily levered group rose off depressed levels as capital markets
Scott Hansen improved and liquidity concerns eased, taking off the table, at the time somewhat
(1-212) 622-2250 more understandable though now seemingly quite remote, fears of insolvency and an
scott.hansen@jpmorgan.com inability to roll debt maturities forward. The group then staged a second rally, this on
Kris Weber the introduction of health reform legislation and in particular the prospect of a broad
(1-212) 622-2262 increase in insurance coverage levels, this potentially drastically reducing the burden
kris.weber@jpmorgan.com
of uncompensated care (includes bad debt, charity care, and uninsured discounts),
J.P. Morgan Securities Inc. which run at nearly one-fifth of hospital revenues. Most of the reform legislation
contemplated would reduce the uninsured rate to just 5-10%, this about half of the
Community Health Systems Inc. (CYH) .......N
current amount. While clearly still favorable, the emergence of additional legislative
Health Management Associates Inc. (HMA) N
LifePoint Hospitals Inc. (LPNT) ....................N detail has perhaps moderated some of the initial optimism, as coverage levels are
Tenet Healthcare Corp. (THC) .....................N likely to be less than originally anticipated.
Universal Health Services Inc. (UHS) ..........N
Looking ahead, we see mounting pressure in 2010 from uncompensated care
weighing on margins, as levels have been rising throughout 2009 and show no signs
of slowing, with the prime factor being further reductions in commercial coverage
levels due primarily to loss of employer-sponsored insurance (and a corresponding
deterioration in payor mix, with self-pay and lower-reimbursement Medicaid admits
rising). We note that while the broader economy may see improvement next year, the
effect on these metrics has historically lagged, with health benefits often extending
post an initial job loss through both employer provisions and COBRA, with the loss
of health coverage many months after the initial job loss. Also, for most of the
publicly traded group, the geographical distribution of beds is biased somewhat
toward those states and regions more severely hit by the economic downturn, with
improvement here also likely somewhat slower to return.
Against what we expect to be rising uncompensated care pressures is the likely
inability to repeat the labor savings that a number of facility operators were able to
extract in 2009. Many, over the course of the year, enacted some combination of
freezing wages, eliminating 401k contributions, reducing contract labor, and
negotiating more favorable terms with organized labor. While these cost saves
benefited the current year (and for many, offset the increases in uncompensated
care), we expect many of these benefits to annualize in 2010 and not only fail to
recur, but more likely serve as headwinds, as some of these compensation
components are re-introduced.
Best Idea
We see Tenet Healthcare (THC) with the most upside opportunity, as the company
continues to realize the early benefits of its turnaround strategy and, with the lowest
margins in the group (about 300bps below average), presents an opportunity for
differentiated margin expansion, creating more offset for uncompensated care
pressures. Stability in the credit markets and an improved cash flow outlook should
ease concern over the company’s sizable debt obligations.
Tenet Healthcare (THC) – Neutral – Dec 10 Price Target: $7.00

Price 52-Wk Range FY EPS P/E Mkt Cap
$4.77 $6.39 $0.78 Dec-09 ($0.08) $0.16 $0.20 29.81 23.85 $2,295
43
December 2009
Healthcare Technology & Distribution

Labor Market Recovery Should Drive Additional Rx Use
Lisa C. Gill AC Job creation should drive additional prescription usage. We remain positive on
(1-212) 622-6466 the pharmaceutical supply channel in general, based on favorable demographic
lisa.c.gill@jpmorgan.com trends and expected growth in prescription utilization. While pharmaceutical
Michael R. Minchak market growth has slowed relative to historical levels due partly to the weak
(1-212) 622-6506 economy, we believe growth could reaccelerate with easing comps and a recovery in
mike.minchak@jpmorgan.com the labor market. Generic launches are expected to ramp in 2010 and continue to
Atif Rahim accelerate as we move into 2011; we note that generics are generally more profitable
(1-212) 622-6671 across the pharmaceutical supply channel. Beyond the recovery of the economy,
atif,rahim@jpmorgan.com
political reform continues to be a focus of attention across the healthcare industry. It
J.P. Morgan Securities Inc. is expected that a healthcare bill will pass in early 2010. In our view, absent a single-
payor, government-run system (which we don’t believe is very likely), nearly all
AmerisourceBergen (ABC) ...........................N
aspects of current plans would be incrementally beneficial to the companies in our
Animal Health International, Inc. (AHII) ........N
Cardinal Health (CAH)..............................OW universe, including increased coverage, adoption of healthcare IT, and a pathway for
CVS Caremark Corp. (CVS).....................OW biogenerics.
Express Scripts, Inc. (ESRX)....................... rs
Henry Schein Inc (HSIC) .......................... UW We believe the PBMs are the best-positioned subsector we follow in the near
McKesson Corporation (MCK)..................OW term. In our view, the outlook for the PBMs remains strong, based on two key
Medco Health Solutions, Inc. (MHS) ........OW drivers: generics and specialty pharmacy. We believe the weak economy has led to
MWI Veterinary Supply, Inc. (MWIV)............N plan designs that promote utilization of mail and generics, which are more profitable
Omnicare Inc. (OCR) ................................OW
Owens & Minor, Inc. (OMI) ...........................N
for PBMs. If we see job creation, as expected by our Economics and Strategy teams,
Patterson Companies (PDCO) .....................N this will add incremental volume to a highly levered infrastructure, thus increasing
PSS World Medical, Inc. (PSSI) ...................N profitability. Further, the next generic wave will build significantly as we head
Rite Aid (RAD) ..........................................OW toward 2011. Finally, the specialty pharmacy opportunity remains strong, based on a
Walgreen Company (WAG)..........................N robust biotech pipeline and ongoing demand from plan sponsors looking to rein in
rising specialty drug costs. For the pharmaceutical distributors, the longer-term trend
remains favorable as well, especially if we see incremental prescriptions from those
regaining health benefits as the labor market recovers. Similar to the PBMs, the drug
distributors have high fixed-cost bases, and therefore incremental scripts are very
accretive to the model. For the retail pharmacies, while top-line growth has slowed
relative to historical levels, we point to some recent stability in monthly same-store-
sales trends, and expect generic utilization and private-label sales to continue to
benefit margins. Further, the weak economy has created consolidation opportunities
for the larger chains, as smaller chains and independents find it increasingly difficult
to compete with the large chains, supermarkets, and mass merchandisers. As the
economy recovers, they are especially well positioned to take advantage of the
increasing market basket by the consumer.
Best Idea
Our best idea for 1H10 is Medco (MHS), as we believe it is one of the best-
positioned PBMs given its best-in-class mail operations and strong specialty
pharmacy business. Medco continues to gain market share from competitors based on
its unique offering, including personalized medicine and Therapeutic Resource
Centers. We believe several key factors should continue to drive strong growth for
Medco going forward, including new generic introductions, specialty pharmacy
growth, new business wins, and share buybacks.
Medco Health Solutions (MHS) – Overweight – Dec 10 Price Target: $65

$63.68 $64.29 $36.46 Dec-09 $2.27 $2.82 $3.32 22.58 19.18 $30,360
44
December 2009
Managed Care
Trough Margins and Multiples Create a “Second Leg” Backdrop as We Exit Reform
John Rex AC We continue to find ourselves increasingly constructive on the stocks, with the
(1-212) 622-6600 probable set of reform outcomes more constrained/analyzable, this still being the
john.rex@jpmorgan.com prime factor for the group. It is, after all, not February 2009 any more. That is, we
Scott Hansen know considerably more than in those early, murky reform days, are much closer to a
(1-212) 622-2250 conclusion, and with the stocks reflecting the probable base case, we see potential to
scott.hansen@jpmorgan.com incorporate incremental, moderating elements. While with the headwinds of
Kris Weber unemployment, Medicare rates, flu, and COBRA, it’s difficult to get excited about
(1-212) 622-2262 2010 operating results, we like the longer-term view more than we have in some
kris.weber@jpmorgan.com
time, with underwriting margins having re-set to levels we haven’t seen in years.
J.P. Morgan Securities Inc. Importantly, we believe this creates the backdrop for a second, sustainable leg in the
stocks, once we get through reform.
Aetna Inc. (AET) .......................................OW
AmeriGroup Corp. (AGP) .............................N We’re struck by the fact that commercial medical cost ratios have re-traced to an
Centene Corp. (CNC) ...................................N
industry-wide median of 87% (this measure including for-profits and not-for-profits),
Cigna Corp. (CI)........................................OW
Coventry Health Care Inc. (CVH) .................N the highest we have seen in many years. For us the bottom line here is that the
Health Net Inc. (HNT) .................................. rs probability for multi-year margin expansion is much better than it has been for some
Humana Inc. (HUM)......................................N time and, someday, we believe “the cycle” will matter again.
Molina Healthcare Inc. (MOH) ......................N
UnitedHealth Group (UNH).......................OW Admittedly, 2010 operating earnings are decidedly not exciting, but at this point a
WellCare Health Plans Inc. (WCG) ..............N factor we consider to be widely understood. Given the drag of lower commercial
WellPoint Inc. (WLP).................................OW member months (from unemployment) and Medicare Advantage rate cuts (down
5%), operating earnings for most of the group should be flat to down in 2010, this
not exactly the profile that gets recovery-focused investors excited, but also we
believe well understood.
In the end, the stocks are really still all about reform. There is something to time
value—we are now much closer to resolution and the outcomes are now more
analyzable…and, health benefit companies are still going to be around and relevant
even in a post-reform world. The bottom line, whether every politician realizes it or
not yet, the government simply does not possess the tools or capabilities to perform
the vast majority of functionality to run the system (case in point, virtually all of the
vaunted traditional Medicare and Federal Employee benefit program operations are
outsourced to the private sector today). To be sure, we’re not saying that this is
“good” legislation, as it unfortunately does nothing to bend the cost curve lower and,
more likely, will take underlying trend higher. At some point, however, one has to
acknowledge what is already in the stocks, the likely returns that companies of scale
can still generate over the longer term, and, importantly, the likelihood for
refinements that moderate some of the more onerous provisions. That is, we believe
that the outlook only becomes somewhat improved from here.
Best Idea
We broadly favor the large-cap names in the group, these showing the steepest
discount to historical trough multiples and we anticipate the most likely to show
meaningful share appreciation over the coming months. These include Overweight-
rated AET, CI, UNH, and WLP, and of these UNH remains our top pick.
UnitedHealth Group (UNH) – Overweight – Dec 10 Price Target: $35.00

$28.70 $30.25 $16.18 Dec-09 $2.98 $3.15 $3.15 9.11 9.11 $33,350
45
December 2009
Medical Technology & Devices

Outlook for 2010
Michael Weinstein AC Healthcare stocks underperformed in 2009 amid a market shift to early cyclicals and
(1-212) 622-6635 the Washington debate on Healthcare Reform. We expect performance to improve in
mike.weinstein@jpmorgan.com 2010, but the timing and level of outperformance depends on: (1) the broader
Taylor Harris recovery in corporate profits, (2) the timing of Fed rate increases, and (3) the
(1-212) 622-6433 outcome of reform—all of which are separate from fundamentals.
taylor.c.harris@jpmorgan.com
J.P. Morgan Securities Inc. Working in the industry’s favor are reduced valuations. The sector trades today at
13.5x 2010E EPS, 8.4x 2010E EBITDA, and has a 7.0% FCF yield. On a P/E basis,
Abbott Laboratories (ABT)........................OW that puts it at an 8% discount to the S&P, while over the prior 20 years it averaged a
Alcon, Inc (ACL)............................................N 20% premium. Moreover, sector fundamentals should improve in 2010 as comps
Baxter Intl (BAX) .......................................OW
ease and the industry benefits from a pickup in key markets. The added catalyst is
Becton, Dickinson & Co (BDX) .....................N
Boston Scientific Corporation (BSX) ........OW foreign exchange, with 43% of industry revenues coming from outside the United
Edwards Lifesciences (EW)...................... UW States. The sector’s relative performance has in recent history correlated with the
EnteroMedics (ETRM) .............................. UW dollar—a weaker one and a resulting FX tailwind being positive for performance and
ev3, Inc. (EVVV) ...........................................N a stronger one (FX headwind) being a detriment.
Hansen Medical (HNSN) ..........................OW
Insulet Corp (PODD).................................OW The key challenge for 2010 is that U.S. corporate profit growth is likely to outpace
Johnson & Johnson (JNJ) ............................N that of healthcare, including Med Tech, and this may dictate the timing of investor
Kinetic Concepts, Inc (KCI) ..........................N
attention, along with the outcome of healthcare reform.
Medtronic (MDT).......................................OW
St Jude Medical (STJ) ..............................OW
Stryker Corp (SYK) .......................................N Best Idea
Talecris Biotherapeutics (TLCR) ..............OW Our best large-cap idea for 2010 is St. Jude Medical (STJ). After a disappointing
The Cooper Companies, Inc. (COO)........ UW
3Q, management has set a low 4Q bar, and Street estimates for 2010 look
Volcano Corporation (VOLC)....................OW
Zimmer Holdings (ZMH) ...............................N
conservative. We think St. Jude can deliver 8% organic revenue growth and 13-14%
EPS growth in 2010 through 2014. Yet, St. Jude is trading at just 13.4x our 2010
forecast and our 11.7x 2011 forecast.
We expect Street confidence in St. Jude’s outlook to increase following an upside 4Q
performance and increased visibility around share gains in each of the company’s
key markets. St. Jude should benefit in 2010 from new product launches and an ICD
replacement cycle in CRM, double-digit gains in AF and Neuromodulation, and the
early development of the company’s DBS business in Europe. St. Jude should also
benefit in ’10 from the weaker dollar with a 3% top-line tailwind likely to add 6-7%
to EPS, as the company does not hedge its currency exposure (this hurt 2009). Lastly,
on the pipeline front, we look for the company’s Parkinson’s and Migraine programs
to garner increased Street attention ahead of pivotal trial data and an FDA
submission in 2H10.
St. Jude Medical (STJ) – Overweight – Dec 10 Price Target: $48.00

$37.09 $41.96 $26.46 Dec-09 $2.29 $2.42 $2.75 15.33 13.49 $12,398
46
December 2009
SMid Cap Medical & Life Science Technology

Stick with Quality
Tycho Peterson AC With modest U.S. GDP growth expectations heading into 2010, we think that life
(1-212) 622-6568 science tools companies generally remain well positioned within our coverage
tycho.peterson@jpmorgan.com universe, given the pro-cyclical nature of the industry, increasingly diversified end
Sung Ji Nam markets, and relatively less direct exposure to U.S. healthcare reform as compared
(1-212) 622-4958 with our Med Tech and diagnostic coverage universe. Having weathered mixed end-
sung.j.nam@jpmorgan.com market conditions for much of the past year, stemming from industry
Abigail Darby consolidation/restructuring (biopharma), a lack of near-term growth in research
(1-212) 622-6628 funding (flat core NIH funding, endowment declines), and headwinds from the
abigail.w.darby@jpmorgan.com
global economic downturn, life science companies are heading into 2010 with an
J.P. Morgan Securities Inc. improved outlook overall, driven by pending ARRA stimulus disbursements (e.g.,
$10.4bn via NIH, as well as additional funding from DOE, NSF, etc.), new product
Accuray (ARAY)............................................N
cycles (mass spectrometry, DNA sequencing, etc.), strength in emerging markets
Affymetrix (AFFX) ..................................... UW
American Medical Systems (AMMD)........OW (China, India), increasing demand in regulated areas (clinical diagnostics, food
Beckman Coulter (BEC) ...............................N testing, etc.), benefits from cost-control initiatives, anticipated improvements to
Bruker Corporation (BRKR)......................OW visibility around biopharma spending post-consolidation, and a potential late-2010
Charles River Laboratories (CRL) ................N boost from stabilization in industrial markets. With an anticipated baseline of low-
Covance (CVD).........................................OW single-digit GDP growth, aided by an end of the destocking cycle and improved
Genomic Health (GHDX) ..............................N
Gen-Probe (GPRO) ..................................OW
M&A environment (strong balance sheets, lower financing costs, and
Hologic (HOLX).........................................OW underinvestment), we expect that higher-quality companies in the group should be
Home Diagnostics, Inc. (HDIX).................OW able to achieve low-single-digit to mid-single-digit top-line growth, and high-single-
ICON Plc (ICLR) .......................................OW digit to mid-teens EPS growth, a notable improvement over 2009 levels, but
Illumina, Inc. (ILMN)..................................OW nonetheless tempered compared with the pre-downturn period.
Intuitive Surgical, Inc. (ISRG) .......................N
Life Technologies Corporation (LIFE) ......OW Best Idea
Luminex (LMNX)...........................................N
Mettler-Toledo (MTD) ...............................OW While we expect macro headwinds to pressure top-line and earnings in the near term,
Millipore Corp (MIL) ......................................N Thermo Fisher Scientific (TMO) trades at 14x our 2010 EPS estimate of $3.35, an
Sirona Dental Systems Inc (SIRO)...........OW 11% discount to a peer group of life science tool, diagnostics, and industrial
SonoSite (SONO) .....................................OW companies. Given the track record around new products, execution in cost
Thermo Fisher Scientific (TMO) ...............OW management, diversification and expansion across end markets, as well as potential
Varian Medical (VAR) ...................................N
Waters (WAT) ...............................................N
for further revenue/earnings upside from government stimulus, industrial
WuXi PharmaTech (WX) ..............................N stabilization, M&A, and buybacks, we feel that Thermo remains well positioned over
the intermediate to longer term.
As a reminder, after a challenging start to the year, 2Q and 3Q were notable for
continued improvement in consumable demand (more normalized demand vs.
inventory destocking before), strong FCF (>$1bn YTD), and continued upward
adjustments to EPS guidance, providing additional confidence in the core business
and investment outlook, which Thermo should be able to further leverage with a
strong balance sheet, smaller-sized M&A, and traction from operational initiatives
undertaken over the past year. With assumptions for slightly higher EPS growth
(12%) vs. peers (11%), we apply a 16.4x P/E multiple (in line with peers) to our
2010 EPS estimate to reach our Dec 10 price target of $55.
Thermo Fisher Scientific (TMO) – Overweight – Dec 2010 Price Target: $55.00
$47.89 $48.51 $28.52 Dec-09 $3.15 $3.00 $3.35 15.96 14.30 $19,554
47
December 2009
Pharmaceuticals – Major
Selected Opportunities in a Rapidly Evolving Market
Chris Schott, CFA AC We see the major pharma sector entering 2010 well positioned, as we see the
(1-212) 622-5676 combination of consolidation benefits and inexpensive valuation more than offsetting
christopher.t.schott@jpmorgan.com healthcare reform headlines. Across the sector, we are encouraged by the broader
Jessica Fye acknowledgement of excess industry capacity and believe that consolidation begins
(1-212) 622-4165 to address overarching fundamental challenges for the sector (i.e., patent cliffs,
jessica.m.fye@jpmorgan.com FDA/regulatory risk, etc.).
Yuriy Prilutskiy
(1-212) 622-4162 Improvements in sector news flow, including broader clinical data catalysts, post-
yuriy.a.prilutskiy@jpmorgan.com merger analyst days, and clarity on healthcare reform, coupled with valuations near
J.P. Morgan Securities Inc. all-time lows, position the group for outperformance, in our view. In particular, we
are enthusiastic about the prospects for the recently merged entities, Pfizer and
Bristol-Myers Squibb Company (BMY).........N Merck, which we expect to outperform the non-merger names.
Eli Lilly & Company (LLY)......................... UW
Merck & Co., Inc. (MRK)...........................OW Best Idea
Pfizer Inc. (PFE) .......................................OW
With potential for sooner-than-expected merger synergies to drive near-term earnings
beats, low pipeline expectations leaving room for upside to the multiple, and
ultimately a more stable, diversified business post-2012, the “new” Pfizer (PFE) is
very well positioned, in our opinion. We view Pfizer’s long-term 2012 EPS guidance
as achievable and see the potential for simultaneous multiple expansion and upward
earnings revisions as the company’s long-term profile solidifies.
Pfizer (PFE) – Overweight – Dec 10 Price Target: $21.00

$18.85 $18.99 $11.62 Dec-09 $2.42 $2.01 $2.24 9.38 8.42 $152,111
48
December 2009
Pharmaceuticals – Specialty
Selected Opportunities in a Rapidly Evolving Market
Christopher Schott AC Generics

(1-212) 622-5676 We continue to view the generics as well positioned for potential near-term EPS
christopher.t.schott@jpmorgan.com upside and will be watching 2010 results for continued upside to base U.S. generic
Yuriy Prilutskiy pricing trends. We see this structural improvement benefiting names such as MYL,
(1-212) 622-4162 TEVA, and WPI and driven by a combination of manufacturing challenges for
yuriy.a.prilutskiy@jpmorgan.com several competitors in the space, an ongoing slowdown in non-first to market ANDA
Jessica Fye approval times, and continued industry consolidation. We continue to rate Mylan and
(1-212) 622-4165 Teva Overweight, and forecast strong EPS growth for both names in 2010, driven by
jessica.m.fye@jpmorgan.com
accelerating new product flow and realization of meaningful synergies from the
J.P. Morgan Securities Inc. Merck KGaA and Barr acquisitions, respectively.
Allergan (AGN) .............................................N Specialty Pharmaceuticals
Biovail (BVF).............................................OW Our specialty pharma universe faces many of the same challenges as the major
Cephalon, Inc. (CEPH) .............................OW
pharma group (i.e., near-term patent expirations, regulatory risk, increasingly
Endo Pharmaceuticals (ENDP) ................OW
Forest Laboratories, Inc (FRX) ................. UW difficult managed care environment). However, with valuations reflecting significant
Medicis Pharmaceutical Corp. (MRX) ..........N concerns over the sustainability of core franchises, we see select opportunities for
Mylan Inc. (MYL).......................................OW companies poised to benefit from ongoing business development and continued
Teva Pharmaceuticals (TEVA) .................OW strong near-term pricing/script trends in niche therapeutic categories. Our top picks
Warner Chilcott (WCRX)...........................OW are Overweight-rated Biovail (BVF, Dec 2010 price target of $19) and Warner
Watson Pharmaceuticals (WPI)................... rs
Chilcott (WCRX, Dec 2010 price target of $27).
Best Idea
Overall, we are encouraged by new management’s execution to date as Biovail
restructures and transitions itself further into the branded specialty CNS (central
nervous system) market, and see the Xenazine and Wellbutrin XL deals as solid first
steps to doing so. Entering 2010, we see additional Biovail catalysts in the form of
further business development and restructuring-driven margin improvement. With
current valuation (at roughly 6x ’10E cash EPS) giving the company little credit for
these initiatives, in our view, we see an attractive entry point for Biovail shares.
Biovail (BVF) – Overweight – Dec 10 Price Target: $19.00

$14.57 $15.50 $7.95 Dec-09 $1.49 $2.19 $2.29 6.65 6.36 $2,306
Estimates shown above reflect adjustments made on December 2, 2009.
49
December 2009
50
December 2009
Base Metals & Steel
Materials
Time to Buy the Integrated Steels
Michael F. Gambardella AC Integrated steels have the most leverage to a domestic economic recovery. In our
(1-212) 622-6446 coverage universe, we believe the integrated steel stocks like U.S. Steel, AK Steel,
michael.gambardella@jpmorgan.com and to a lesser extent ArcelorMittal have the greatest earnings leverage to the
Nathan M. Zibilich rebounds in domestic GDP growth and, more specifically, industrial production that
(1-212) 622-2039 our economists are forecasting for 2010 and 2011. Steel demand should see a
nathan.zibilich@jpmorgan.com significant benefit from the growth our economists are forecasting from both the lift
Tyler J. Langton to true end market demand and as such growth should also force distributors and
(1-212) 622-5234 consumers to build inventories to more normalized levels off of record lows. A
tyler.j.langton@jpmorgan.com
continuation of the weak dollar should also benefit demand for the domestic
J.P. Morgan Securities Inc. producers as it will limit imports and encourage exports of steel mill products and
steel-containing products. With this demand increase, we expect steel sheet prices
(and stock prices) to rise rapidly given the severe constraints throughout the U.S.
AK Steel (AKS) .........................................OW supply chain, driven by limited imports, record-low inventory levels, and minimills
Alcoa (AA).................................................OW
running at near capacity in their sheet operations. As a result, nearly all the supply
Allegheny Technologies (ATI) .................. UW
Arcelor Mittal (MT) ....................................OW available to satisfy incremental demand likely will have to come from just the few
Carpenter Technology (CRS) .......................N integrated producers. We believe the initial surge in sheet prices will feed upon itself
Century Aluminum Company (CENX) ..........N as consumers are jolted into a buying frenzy after one of the industry’s most severe
Cliffs Natural Resources (CLF).................OW de-stocking periods. While all domestic sheet producers should benefit when demand
Commercial Metals (CMC) ...........................N increases, we believe the integrated producers will capture the lion’s share of the
Dynamic Materials (BOOM)..........................N
Freeport-McMoRan Copper & Gold (FCX)...OW
operating earnings leverage from volumes, costs, and prices. As a result, even a
Gerdau Ameristeel (GNA) ........................OW relatively modest steel demand recovery should cause integrated steel earnings
Globe Specialty Metals (GSM) .................OW expectations to rise and stock prices to jump.
GrafTech International (GTI) ........................N
Haynes International (HAYN) .......................N Metals and miners should also benefit but have seen more of a rebound from
Nucor Corp. (NUE) ...................................OW their exposure to China and global growth. The metals and mining stocks should
Steel Dynamics, Inc. (STLD) ....................OW also benefit from the U.S. and other developed markets again contributing to global
Teck Resources (TCKb.TO) .....................OW
growth, continued strength in emerging markets (particularly China and its
Thompson Creek Metals (TC) ..................OW
U.S. Steel Corp (X) ...................................OW
infrastructure-heavy stimulus packages), and a weak dollar, as all should drive metal
Worthington Industries (WOR) .....................N prices even higher given continued supply discipline by the industry.
Best Idea
U.S. Steel (X) remains our preferred way to play any increase in steel demand as it
should see significant earnings leverage to a rebound in steel demand and prices
given its high level of fixed costs. We continue to think the market is pricing in too
negative an outlook for the company (it had the ninth-highest short interest/float ratio
in the S&P 500 in October), and underestimating the earnings power that the
company can generate even with a modest improvement in economic activity. We
think our Street-high estimates for the stock remain conservative and that a slightly
more vigorous snapback in steel demand and prices could push numbers even higher.
U.S. Steel (X) – Overweight – Dec 10 Price Target: $55.00

$45.18 $51.65 $16.66 Dec-09 $17.14 ($11.70) $3.45 N/M 13.10 $6,477
51
December 2009
Coal
High Coal Inventories Cap Upside, Though Better Coking Coal Prices Should Help a Little
John Bridges AC J.P. Morgan’s base case economic outlook of 3.5% real GDP growth through 2011 is
(1-212) 622-6430 below the historical rates of 5% to 7% growth that typically follow deep economic
john.bridges@jpmorgan.com downturns. This is expected to be coupled with very high unemployment and large
Ankush Agarwal fiscal deficits. Given this backdrop, we feel that the supply/demand balance should
(1-212) 622-5623 improve slightly for the coal miners later in 2010, but the market is expected to
ankush.agarwal@jpmorgan.com remain tough in H1. As Consol’s Brett Harvey described it, 2010 looks set to be a
J.P. Morgan Securities Inc. “bridge year” for the U.S. coal miners.
Arch Coal, Inc. (ACI).................................OW The abnormally large utility inventories would be a signal to start looking for
CONSOL Energy (CNX) ...............................N opportunity in the U.S. coal sector. U.S. utilities currently have thermal coal
International Coal Group (ICO).....................N
inventories at about a 30-year high. The coal sector faces challenges that could slow
Massey Energy (MEE)..................................N
Peabody Energy (BTU).................................N
its recovery such as:
• The risk of a jobless recovery capping power demand growth.
• Abundant natural gas continuing to take market share from coal.
• The push to use more renewable energy coupled with a focus on more efficient
usage likely slowing demand growth as the economy exits the downturn.
• And then there’s carbon control and global warming.
We expect the need for more cuts to coal miner production through year-end,
and this is likely to depress operating results for the next few quarters. While
smaller, higher-cost miners should close down in this tough environment, we believe
utilities will keep many of the smaller miners in business to maintain a diverse
supply base, making a “V”-shaped recovery in pricing unlikely.
Sharply higher Chinese coal imports have lifted coking coal prices. The more
aggressive infrastructure spending in China has taken steel production to new highs
and raised coking coal imports, but the main beneficiaries have been Australian
miners. U.S. miners primarily sell to U.S. domestic, European, and Brazilian steel
makers. The extra transport cost generally makes Appalachian coking coal
uneconomic into Asia. Recently, Australian port congestion has encouraged U.S.
producers to discount their coal into the Asian market.
What happens to Chinese coal demand in 2010? After the 11/20/09 mine disaster,
we expect the Chinese government’s initiative to consolidate mines will be
emphasized and this should lead to continued and possibly larger imports. However,
once the consolidated mines reopen, they should be more productive, reducing the
needs for coal imports.
We believe there could be better entry points in the coal sector during H1 2010.
After appreciating 170% from their November 2008 lows, the coal equities, in our
view, are priced for a trouble-free recovery. While the coking coal sector looks firm,
the bulk of the U.S. miners’ business is in thermal coal, which may need more
production cuts. Arch (ACI) offers the most exposure to a strong U.S. economic
recovery, and Peabody (BTU) has a small but profitable sector in Australia serving
the Asian market.
52
December 2009
Chemicals
Brighter Times
Jeffrey Zekauskas AC Specialty Chemical companies should be well positioned for 2010. Specialty
(1-212) 622-6644 companies have reduced employee counts by 10% on average, making for
jeffrey.zekauskas@jpmorgan.com considerable operating leverage in the event of positive demand changes. Moreover,
Silke Kueck specialty chemical price trends have generally been stable despite sharp raw material
(1-212) 622-6503 decreases in oil-based raw material feedstocks. It is no accident that sequential
silke.x.kueck@jpmorgan.com incremental margins are running above 50% for many key chemical companies.
Olga Guteneva Beneficiaries of these trends include DuPont, Sherwin-Williams, H.B. Fuller,
(1-212) 622-6488 Ashland, and WD-40, which we rate Overweight.
olga.v.guteneva@jpmorgan.com
Ben Richardson In fertilizers, we favor the nitrogen-producing companies versus the potash and
(1-212) 622-6455 phosphate producers. Natural gas prices in the United States are low relative to
ben.richardson@jpmorgan.com natural gas prices in the large Eastern Europe and CIS export markets, providing the
J.P. Morgan Securities Inc. North American producers a cost advantage. Grain prices have moved higher: corn is
more than $4.00 per bushel and soybeans are above $10.00 per bushel, positioning
Jeffrey Zekauskas: the farmer well for a profitable year. Delays in potash contract resolutions with China
Agrium (AGU) ...............................................N
Air Products and Chemicals (APD) ..........OW
are leading to low levels of potash demand as customers await further price
Albemarle Corporation (ALB) .......................N reductions before purchasing. We rate Terra Overweight, and we rate CF Industries,
Ashland Inc. (ASH) ...................................OW Agrium, Potash Corp., and Mosaic Neutral.
Avery Dennison (AVY)..............................OW
Cabot Corporation (CBT).......................... UW 2010 could prove to be a trying year for commodity chemical producers
CF Industries Holdings, Inc. (CF) .................N including Dow Chemical, which we rate Neutral. Large capacity additions (8-9%) in
Compass Minerals International, Inc. (CMP) OW the ethylene chain for 2010 are likely to mean a year of oversupply and poor product
Dow Chemical (DOW) ..................................N margins. Additional ethylene capacity increases of 4-5% for 2011 should mean no
DuPont (DD) .............................................OW
Eastman Chemical Company (EMN) ...........N
quick recovery in margins. If oversupply were to be coupled with oil price inflation,
Ecolab Inc. (ECL)..........................................N margins in Europe and North America would be razor-thin.
Georgia Gulf (GGC)......................................N
H.B. Fuller (FUL).......................................OW Best Idea
Huntsman Corporation (HUN) ......................N
Innophos (IPHS) ...........................................N
Ashland represents an exceptional opportunity for value investors, in our view.
Innospec (IOSP) ...........................................N The shares trade at $37 and the normalized free cash flow of the company is in
International Flavors & Fragrances (IFF) .....N excess of $5.00 per share, or a free cash flow yield of 13.5%, on a normalized basis.
Lubrizol Corporation (LZ)..............................N In addition, the shares are quite inexpensive, selling at 4.1x EBITDA and 12.0x EPS
Minerals Technologies (MTX)...................OW on our F2010 estimates compared to peer averages of 6.2x and 17.3x, respectively.
Monsanto (MON) ..........................................N
We expect Ashland to generate 12% of its share price in free cash flow in F2010.
Nalco (NLC) ..................................................N
Novozymes (NZYMb.CO).............................N Ashland (ASH) should benefit from cost reduction initiatives being implemented
Pall Corporation (PLL) ..................................N in 2009-2010 and from cyclical demand improvement. Ashland’s F2009 cost
Polypore International (PPO)........................N reduction program resulted in $355m in savings, and it is likely to realize an
Potash Corp. (POT) ......................................N
Praxair (PX) ..............................................OW
additional $100m in savings in F2010. ASH sales volumes declined (15-25%) in
RPM International Inc. (RPM).......................N F2009 reflecting significant exposure (about 30% of total revenue) to construction
Scotts Miracle-Gro Co. (SMG)......................N and auto markets. Global economic recovery working in tandem with a much leaner
Sherwin-Williams (SHW) ..........................OW cost structure should lead to meaningful profitability improvement in Ashland
Synthesis Energy Systems, Inc. (SYMX) .....N specialty chemical businesses in future periods. The company has already made
Terra Industries (TRA)..............................OW
substantial progress in lifting returns in Water Treatment and Functional Ingredients
The Mosaic Company (MOS) .......................N
Valspar Corp (VAL).......................................N
(Aqualon). We expect meaningful improvement in the cost structures of Performance
WD-40 Company (WDFC)........................OW Materials and Distribution in F2010.
Westlake Chemical Corp (WLK)...................N
Ashland (ASH) – Overweight – Dec 10 Price Target: $48.00
Silke Kueck: Price 52-wk range FY EPS P/E Mkt Cap

Rockwood Holdings, Inc. (ROC)...............OW 12/01/2009 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
$36.62 $45.80 $5.35 Sep-10 $2.84 $3.10 $3.30 11.81 11.10 $2,743
53
December 2009
Gold & Precious Metals

Gold Reemerging as a Currency
John Bridges AC Given the backdrop of J.P. Morgan’s base case economic outlook of 3.5% real GDP
(1-212) 622-6430 growth through 2011 but very high unemployment and large fiscal deficits, we
john.bridges@jpmorgan.com maintain our positive view on the gold and silver space for 2010, driven by the
Ankush Agarwal expectation of inflation developing probably later in 2011.
(1-212) 622-5623
ankush.agarwal@jpmorgan.com With the Fed expected to hold rates near zero until 1H 2011, we believe uncertainty
J.P. Morgan Securities Inc. related to the Fed’s and other Central Banks’ exit policies is likely to put further
pressure on the dollar and other fiat currencies. At the same time, supply-side
Agnico-Eagle Mines (AEM) ..........................N constraints in the form of reduced mine supply and reduced Central Bank sales
Barrick Gold (ABX) ...................................OW should support prices. The reemergence of gold as “an asset class” or as “a currency”
Coeur d'Alene (CDE) ....................................N
is likely to raise investment demand, though jewelry demand is likely to fall.
Compania de Minas Buenaventura (BVN) ...N
Gold Reserve (GRZ).....................................N
Our economics team expects core inflation to remain well under 1% in 2010-11, and
Goldcorp Inc (GG) ....................................OW
Kinross Gold (KGC) ..................................OW
this should protect the margins for the gold and silver miners, unlike what happened
Newmont Mining (NEM)............................OW during 2004-2008, when costs rose more than the rise in the metal prices.
Pan American Silver (PAAS) .................... UW
Silver Wheaton (SLW) ..............................OW Best Idea
Stillwater Mining (SWC)................................N
Goldcorp (GG) is a gold producer in generally low-risk countries in the Americas,
from north Canada to Argentina. It is ramping up production from its new Penasquito
mine in Mexico, where a combination of throughput and grade expansion suggests
50% growth in gold production over the next five years.
We believe Goldcorp occupies the middle ground between the largest gold
companies, which struggle to grow production, and the smaller companies, where
disappointments with growth projects can hurt confidence. Goldcorp’s assets are
located in the more stable locations for mining projects and have exploration upside
potential, in our view. After the recent pickup in base metal prices, we now see value
in Goldcorp based on our option valuation methodology.
Goldcorp (GG) – Overweight – Dec 10 Price Target: $48.00

$44.76 $46.24 $19.67 Dec-09 $0.57 $0.79 $1.01 56.66 44.32 $33,104
54
December 2009
Paper & Packaging

Sector Packing “One-Two Punch” for 2010
Claudia Shank Hueston AC Our outlook for the paper and packaging sector headed into 2010 is
(1-212) 622-6596 constructive, with a positive near-term bias for the paper sector and a favorable full-
claudia.hueston@jpmorgan.com year view of the packagers. Overall, we think 2010 will be a good year for the paper
Mark Masters and packaging sector, and expect outperformance from the group relative to the
(1-212) 622-5469 broader market.
mark.a.masters@jpmorgan.com
Ariel Avila Expect near-term outperformance from the paper companies. Low inflation, a
(1-212) 622-8021 steep yield curve, and an improving macro climate all bode well for the paper sector,
ariel.x.avila@jpmorgan.com and we expect stock price outperformance to continue in the early part of 2010.
J.P. Morgan Securities Inc. Supply-side discipline prevailed in 2009 and prevented significant price declines,
despite very weak levels of demand. Looking to 2010, we expect producers to
AptarGroup (ATR).........................................N continue to aggressively match supply with demand (as evidenced already by several
Ball Corp. (BLL) ........................................OW
permanent capacity closures), and think that tightening operating rates will give way
Bemis Co. (BMS) ...................................... UW
BWAY (BWY)............................................OW
to announced price increases in 1Q10. These price increases—and, importantly, the
Crown Holdings (CCK) .............................OW anticipation of price increases—should drive stock prices higher, particularly in the
Domtar (UFS)............................................OW early part of the year.
International Paper Co. (IP)..........................N
Kadant, Inc. (KAI) .........................................N Indeed, we think paper stock performance could come under some pressure as we
Louisiana-Pacific Corp (LPX) ................... UW move into 2H10, as investors look to rotate out of some of the early cyclicals into
MeadWestvaco (MWV).............................OW higher-quality names and shift to sectors with greater global exposure.
O-I (OI)......................................................OW
Packaging Corp. of America (PKG).......... UW We think packagers are well placed for a strong 2010. With their strong free cash
Pactiv Corp (PTV).....................................OW
flow, global product offerings, and food & beverage–focused end markets, we think
Plum Creek Timber (PCL) ............................N
Rayonier (RYN) ............................................N
the packaging stocks are attractively positioned for full-year outperformance in 2010.
Rexam (REX.L).........................................OW Although J.P. Morgan’s economists expect recovery to take hold in 2010, they
Rock-Tenn (RKT)......................................OW anticipate the macro climate to be marred by high unemployment and higher levels
Sappi (SPP) ..................................................N of consumer saving. Such a climate suggests a more prudent consumer, who will eat
Sealed Air (SEE)....................................... UW more at home, shop more carefully, and spend more wisely, which we believe bodes
Silgan Holdings Inc (SLGN)..........................N
well for the packaging sector.
Sonoco (SON) ..........................................OW
Stora Enso (STERV.HE) ..........................OW
Moreover, as the year unfolds, we believe that the packagers will be increasingly
Temple-Inland (TIN)......................................N
UPM Kymmene Corp (UPM1V.HE)..........OW attractive to investors because of: (1) global product offerings; (2) high-quality
Verso Paper (VRS) .......................................N capital structures with robust free cash flow; (3) strong track record of successful
Weyerhaeuser Company (WY).....................N M&A and balance sheets that should allow companies to take advantage of an
improving climate for deals; and (4) pass-through mechanisms in pricing contracts
that should assuage fears of potential inflationary pressures.
Best Idea
Our best idea for 2010 is O-I (OI). We are attracted to the company’s global product
offering (70% of sales outside North America); significant operating leverage to
improving consumer confidence and a recovery in glass volumes; ongoing cost
reduction and strategic realignment efforts; and attractive valuation, as the stock is
trading at 8.4x our 2010 EPS estimate. We believe our 2010 EPS forecast is
conservative and think that upside could come from improved North American
pricing, better volumes, and a greater-than-anticipated reduction in fixed costs.
O-I (OI) – Overweight – Dec 10 Price Target: $44.00

$30.85 $39.56 $9.53 Dec-09 $3.69 $2.94 $3.70 10.49 8.34 $5,199
55
December 2009
56
December 2009
Advertising & Publishing
Media & Telecommunications

Recovery in Ad Spending Expected to Accelerate as 2010 Progresses
Alexia Quadrani AC Economic stabilization suggests improved ad spending as 2010 progresses. Amid
(1-212) 622-1896 a strengthening global economic outlook, we believe that advertisers are slowly
alexia.quadrani@jpmorgan.com becoming more aggressive with spending in an effort to gain some market share.
Monica DiCenso, CPA While we don’t expect a record-breaking holiday season, we do believe that
(1-212) 622-0473 advertisers are finally ready to start spending again in the hopes of luring a still-
monica.dicenso@jpmorgan.com troubled consumer back into stores and expect sequential quarterly improvement as
Townsend Buckles, CFA, CPA 2010 progresses, with growth likely in the back half of 2010. We believe U.S. ad
(1-212) 622-0461 spending will swing to 1% growth in 2010, following an 11% decline in 2009, while
townsend.buckles@jpmorgan.com
global spending should benefit from faster recoveries in emerging markets and hit
J.P. Morgan Securities Inc. 2-3% growth in 2010, a marked improvement from -8% in 2009. Local advertising
and some beleaguered industries, including auto, may be a bit slower on the rebound;
Arbitron (ARB) ..............................................N
however, significantly easier comps should even allow for growth in these areas.
Cinemark (CNK) .......................................OW
Clear Channel Outdoor (CCO) .....................N
Focus returns to secularly favored media. We expect media companies operating
Gannett Company (GCI)...............................N
Harte-Hanks, Inc (HHS)................................N in secularly favored areas to outperform in 2010 as investor focus moves away from
Interpublic Group of Companies (IPG) .....OW the economy and back towards fundamentals. We believe national-based media
Lamar Advertising Co. (LAMR).....................N companies should see much stronger growth in 2010 than local media, which
National CineMedia, Inc. (NCMI)..............OW continues to be spotty by region in the United States. Within our universe, we
New York Times Company (NYT) ................N continue to favor the ad agencies that are media agnostic, have global exposure, and
Omnicom Group (OMC)............................OW
Regal Entertainment (RGC) .....................OW
through excellent cost management should benefit from nice leverage when revenues
Scripps Networks Interactive (SNI) ..........OW accelerate through 2010. Also, we favor cable networks and outdoor companies as
The E.W. Scripps Company (SSP) ..............N both are secularly well positioned and have continued to steadily gain share from
The McClatchy Company (MNI) ............... UW other, more expensive media, including broadcast, newspapers, and radio.
Valassis Communications (VCI) ...................N
WPP Group (WPP.L) ....................................N Best Idea
Interpublic Group (IPG) is our top pick heading into 2010, as we believe the
valuation gap versus peers will narrow as investors gain confidence in this
advertising recovery and IPG’s ability to approach peer-like results in coming years.
As in prior recessions, agency results should lag GDP and we expect organic
revenues to improve sequentially for the next couple of quarters before reaching
positive growth territory by mid-2010. We remain confident improved sentiment
from advertisers (including some uptick in auto spending next year) should drive a
steady pickup in spending in 2010. IPG continues to aggressively manage costs and
with the recently announced merger of Lowe into Deutsche, we would expect margin
improvement next year even if the recovery takes longer and revenues remain flat.
Despite a tough start to the year, new business trends have recently picked up (e.g.,
the most recent Pizza Hut win), and with a record number of accounts up for grabs, a
few big wins could position IPG even better for top-line growth later in 2010. IPG’s
balance sheet remains healthy, with no significant near-term maturities. We expect
IPG to remain relatively conservative with cash management near term and don’t
expect any significant acquisitions, but do believe that share repurchases or a
dividend are possible later in 2010. At 4.8x ’10E EBITDA, the stock is trading at the
low end of our universe despite significant operational and financial improvements in
recent years. We look for continued strengthening in the ad market and more stability
in results as we navigate through 2010 as reasons for multiple expansion.
Interpublic Group (IPG) – Overweight – Dec 10 Price Target: $10

$6.47 $7.77 $3.08 Dec-09 $0.52 $0.27 $0.40 23.96 16.18 $3,145
57
December 2009
Entertainment
Next Year Will Not Be Without Its Challenges
Imran Khan AC We expect a gradual improvement in U.S. entertainment companies’ earnings

(1-212) 622-6693 throughout 2010, driven by improved advertising trends—with cable networks being
imran.t.khan@jpmorgan.com the main beneficiaries of this dynamic.
Vasily Karasyov
(1-212) 622-5401 We anticipate seeing a further bifurcation of cable networks into “must carry” and
vasily.d.karasyov@jpmorgan.com second-tier channels. We think that first-tier cable properties will continue to be able
J.P. Morgan Securities Inc. to extract healthy price increases from cable and satellite operators. Such channels as
ESPN, Fox News, Comedy Central, and Nickelodeon should continue to wield
News Corporation, Inc. (NWSA)...............OW pricing power. On the other hand, we think that MSOs will be incrementally more
The Walt Disney Co. (DIS) ....................... UW resistant to agreeing to price increases for second- and third-tier properties, especially
Time Warner (TWX)......................................N
given that they are now facing demands for retransmission fees from broadcast
Viacom Inc (VIAb).....................................OW
Xinhua Sports & Entertainment (XSEL) .......N
networks.
We think that the filmed entertainment industry may actually have a tougher year in
’10 than it did in ’09. Theatrical box office once again proved its acyclical nature and
helped drive healthy results at several Hollywood majors. However, we think that
box office is likely to revert to long-term trends next year. Combined with continued
secular pressures on DVD, we see intensifying competition for a smaller pie,
implying more downside risks to earnings estimates.
Best Idea
We believe that Viacom offers the most upside in our coverage universe. We think
that the company could deliver a positive earnings surprise in 2010 driven by:
• Double-digit affiliate revenue growth. We think that Viacom networks will grow
affiliate revenue by 11% next year driven by domestic rate increases and
international subscriber growth.
• Rock Band was a drag on earnings in ’09, but should be profitable in ’10. We
estimate that Rock Band will have a negative impact of $75m on operating
income in ’09, but it should be profitable in ’10. We estimate that each $10m
change in operating income drives $0.01 in EPS.
• Cost saving combined with expected stabilization of advertising revenue could

drive upside to our margin forecast. We currently estimate flattish Media
Networks operating margin of 35.6% in ’10 but see room for upside potential as
management rationalizes programming spending on emerging networks while
investing in must-carry channels; we expect overall programming expense to
grow mid-single digits.
• Filmed Entertainment unlikely to be a drag on ’10 earnings as Paranormal

Activity passes through downstream release windows. Our forecast of $101m in
operating income in ’10 is on the low end of the historical profitability range.
Three films from DreamWorks Animation including Shrek 4 and Iron Man-2
from Marvel should also be a tailwind for Paramount next year.
Viacom (VIA/B) – Overweight – Dec 10 Price Target: $34.00

$30.01 $31.56 $13.15 Dec-09 $2.40 $2.37 $2.47 12.66 12.15 $18,363
58
December 2009
Information Services/TV & Radio Broadcasting

Information Services Well Positioned for 2010; Ad Spending Should Improve in 2010
Michael Meltz, CFA AC We believe that Information Services stocks are well positioned to outperform
(1-212) 622-0416 in an economic recovery given exposure to improving credit/financial markets,
michael.meltz@jpmorgan.com significant operating leverage, and attractive valuations. These companies
David Lewis, CPA (including credit rating agencies, credit bureaus, financial databases, etc.) provide
(1-212) 622-6435 “need-to-have” information for professionals, thus typically enjoying good pricing
david.m.lewis@jpmorgan.com flexibility and high customer renewal rates. The recovery in capital markets activity
Nadia Lovell (debt and equity issuance), M&A, and mortgage applications implies that the
(1-212) 622-4885 estimate bias for many of these stocks is upward—with nice top-line momentum
nadia.s.lovell@jpmorgan.com
bolstered by highly fixed cost bases. That’s especially true for the ratings agencies
J.P. Morgan Securities Inc. (Moody’s, McGraw-Hill) and credit bureaus (Experian, Equifax). We also think that
renewed hiring by financial services firms should be a positive driver in coming
Michael Meltz:
Belo Corp. (BLC) ..........................................N
quarters. And an eventual step-up in business capital and IT expenditures should
CBS Corporation (CBS)............................OW benefit esoteric database providers such as IHS, Gartner, and Verisk (to an extent).
D&B (DNB)................................................OW
Equifax (EFX) ...........................................OW We think many of the TV and Radio broadcasters and Magazine publishers
Experian plc (EXPN.L)..............................OW should benefit from improving advertising spending in coming quarters. These
IHS, Inc. (IHS)...............................................N companies generate the bulk of revenues from advertising, and should exhibit nice
Martha Stewart Living Omni. (MSO) ............N operating leverage amid a recovery. Near-term revenue comparisons are extremely
Meredith Corporation (MDP) ........................N
easy—as most TV and Radio station operators posted >20% revenue drops in H1,09.
Moody's Corp. (MCO)...............................OW
Primedia (PRM) ............................................N National advertising trends have improved ahead of Local, and we think many large
Sinclair Broadcast Group (SBGI)..................N corporate marketers will re-load budgets in early 2010. Continued recovery in major
The Knot, Inc. (KNOT)..................................N ad categories such as Auto, Pharma, Retail, and Financial Services will be key.
The McGraw-Hill Companies (MHP) ........OW While we think the stocks could benefit from upward estimate biases, we do think
Verisk Analytics (VRSK) ...........................OW that investor concern about traditional media’s secular woes will remain an issue.
David Lewis: Best Idea

FactSet Research Systems (FDS) ...............N Equifax (EFX) remains one of our top picks. Heading into 2010, we think the stock
Gartner Inc. (IT) ........................................OW
John Wiley & Sons (JWa).............................N
is well positioned to benefit from an improving economic backdrop and more
Solera Holdings (SLH)..............................OW favorable consumer credit conditions. We like Equifax’s consistency, cash flow, and
valuation. In addition, the stock’s relative price underperformance versus Experian,
D&B, and other quasi-peers makes it more intriguing, in our view.
Results should benefit from ongoing improvement in the financial markets. The
company’s Credit Information unit is highly leveraged to consumer credit sentiment
and spending. Historically, revenues have improved along with employment, housing
prices, and credit card delinquencies. We believe improvement in those metrics will
provide a boost to Equifax’s results in 2010-11. In addition, tight cost control during
the economic downturn should lead to nice operating leverage.
Embed strategy gets Equifax closer to its customers. Equifax is aiming to become
further embedded in the workflow processes of its customers. This allows Equifax to
sell additional value-added tools and applications to its customers and, in turn, drive
incremental demand for its credit and marketing data. “Stickier” relationships are
often much more difficult to displace. Recent acquisitions of targeted income and
wealth databases should help bolster product offerings—especially as lenders
enhance and refine their marketing tactics.
Equifax (EFX) – Overweight – Dec 10 Price Target: $35.00

$29.22 $29.62 $19.63 Dec-09 $2.49 $2.29 $2.45 12.76 11.93 $3,701
59
December 2009
Internet
All Internet Sectors Should Do Well in a Recovery; We Think Amazon Is Best Positioned
Imran Khan AC We expect all types of Internet businesses to benefit from an economic recovery. In
(1-212) 622-6693 particular, we think ad-supported businesses should do well as advertisers allocate a
imran.t.khan@jpmorgan.com larger portion of incremental spend to online channels. Likewise, we think
Bridget Weishaar eCommerce could see a disproportionate share of new consumer spending, as
(1-212) 622-5032 upheavals can accelerate change in consumer behavior.
bridget.a.weishaar@jpmorgan.com
Lev Polinsky As advertisers put extra money to work, Internet can win. Advertisers have been
(1-212) 622-8343 trimming budgets in the recession, and online—especially display, which is highly
lev.x.polinsky@jpmorgan.com discretionary—has felt a significant impact. As budgets go back up, we think Internet
Shelby Taffer advertising can capture a larger portion of the incremental spend.
(1-212) 622-6518
shelby.x.taffer@jpmorgan.com
Shakeup of consumer habits could boost eCommerce. We expect online retail to
continue to gain market share from offline. Further, we believe that consumer habits
developed by a recession—like a greater focus on value—can persist through a
Amazon.com (AMZN) ...............................OW recovery, benefiting eCommerce vendors, which continue to provide more
Blue Nile (NILE) ........................................ UW compelling prices than brick-and-mortar stores. In addition, eCommerce companies
Dice Holdings, Inc. (DHX).............................N can scale capacity more rapidly than offline competitors, especially in verticals that
eBay, Inc (EBAY)..........................................N have seen significant store closures.
Expedia, Inc. (EXPE)....................................N
Google (GOOG)........................................OW
Best Idea
IAC/InterActive Corp. (IACI) .........................N
Mercadolibre, Inc. (MELI) .........................OW We continue to view Amazon.com (AMZN) as our top pick in the space, for several
Netflix Inc (NFLX) .....................................OW reasons: (1) we believe the company is able to benefit from market share gains within
Orbitz Worldwide, Inc. (OWW) .....................N eCommerce even as eCommerce gains market share at the expense of offline retail;
Priceline.com (PCLN) ...............................OW
Shutterfly, Inc. (SFLY) ..............................OW
(2) we think Amazon’s long-term focus on lowering frictions and improving the
Yahoo Inc (YHOO)....................................OW buyer experience has built a powerful eCommerce brand and an operation that can
convert customers into sales more efficiently; (3) we see a large capacity for the
company to grow sales of digital goods, especially eBooks, which should boost
revenue and margins; and (4) Amazon has several differentiated offerings (including
Prime, Fulfillment by Amazon, private-label products, Web Services) that can each
contribute positively to profitability over time.
Amazon.com (AMZN) – Overweight – Dec 10 Price Target: $150.00

$138.50 $142.67 $38.82 Dec-09 $1.49 $1.86 $2.45 74.46 56.53 $59,968
60
December 2009
Telecom Services
Favor Enterprise Wireline and Towers—Top Pick TWTC
Mike McCormack, CFA AC Sector challenges place wireless out of favor

(1-212) 622-1442 Despite the resumption of economic growth, we continue to believe that the wireless
michael.mccormack@jpmorgan.com industry will remain under secular pressures. Amidst high penetration levels and
Scott Goldman heavy competition, we continue to question the prospects for pricing stability.
(1-212) 622-2664 Throughout 2009 we have seen several moves to lower price or include more
scott.goldman@jpmorgan.com features at existing price points across both contract and pay-in-advance carriers. We
Manish Jain believe such actions will continue until the industry sees consolidation across both
(1-212) 622-8692 customer segments, reducing the number of national and regional players competing
manish.x.jain@jpmorgan.com
for remaining subscriber growth. In addition, high levels of unemployment could
J.P. Morgan Securities Inc. continue to drive lower levels of discretionary wireless spend, exacerbating the
pricing situation. Within wireless, we believe the tower operators are much more
American Tower (AMT).............................OW
favorably positioned. Competition on price is likely to drive higher voice and data
AT&T Inc. (T) ................................................N
CenturyTel (CTL) ..........................................N usage levels, and we expect carriers to pursue fourth-generation network
Clearwire (CLWR).........................................N investments, despite any top-line headwinds.
Cogent Communications (CCOI)..............OW
Comcast Corp (CMCSA) ............................. rs Economic improvement could drive better enterprise trends
Crown Castle International (CCI)..................N Several companies have appeared optimistic for enterprise to exhibit some
Equinix (EQIX) ............................................. rs improvement in 4Q09, following sharp deterioration over the last several quarters.
Frontier Communications Corp (FTR) ......... rs Amidst substantial force reductions and budget cuts, corporate customers
Leap Wireless International (LEAP) .............N
Level 3 Communications, Inc. (LVLT) ...... UW
significantly cut their telecom expenditures in late 2008 and 2009. However, with
MetroPCS (PCS) ..........................................N signs that the economy is turning around, companies have noted that equipment sales
NTELOS Holdings Corp. (NTLS)..................N have picked up and decision-making is starting to move more quickly. We believe an
Qwest Communications (Q) .....................OW improvement in labor metrics will be necessary to support a sustainable turnaround;
SBA Communications (SBAC) .................OW however, we believe the tenor exhibited in 3Q points to improving revenue trends. In
Sprint Nextel (S) ...........................................N
addition to enterprise, line-loss trends could begin to moderate, following
Switch and Data (SDXC) ............................. rs
Time Warner Cable (TWC).......................OW
decelerating losses reported at several operators in 3Q09. An improving economy
tw telecom inc. (TWTC) ............................OW could slow consumer adoption of wireless-only services, which has been a driver of
Verizon Communications (VZ)......................N worsening line-loss trends throughout the past year. As a result, those companies
Windstream Communications (WIN) ........... rs with consumer wireline exposure, as well as enterprise businesses, could see
improved top-line and margin trends going forward.
Best Idea
In light of challenges facing the wireless industry and the prospect of improving
enterprise wireline trends, we continue to favor the tower operators and enterprise-
focused telecom operators. Our top pick in our universe is pure-play wireline
provider tw telecom (TWTC), as it is best positioned to capitalize on resumed
growth in enterprise. We believe 3Q09 could reflect a bottom to weakness in
enterprise trends at the company, as it appears delayed decision-making has
stabilized. In addition, despite a weak economy, tw telecom deployed a strategy to
aggressively market its services at a local level, which appears to be resonating well
with customers. The stock is trading at a discount relative to historical valuations on
an EV/EBITDA basis. We derive our $17 December 2010 price target based on a
discounted cash flow analysis.
tw telecom inc. (TWTC) – Overweight – Dec 10 Price Target: $17.00

$14.70 $15.29 $6.35 Dec-09 $0.06 $0.15 $0.22 98.00 66.82 $2,197
61
December 2009
62
December 2009
Applied Technologies
Technology
Getting Smart About the Grid
Paul Coster, CFA AC We believe that the transition to a smart electric grid will gain traction with investors
(1-212) 622-6425 in 2010. U.S. stimulus spending of $3.4 billion is expected to begin flowing to
paul.coster@jpmorgan.com utilities in early January. J.P. Morgan forecasted GDP growth of 3.5% for 2010
Mark Strouse, CFA should lead to higher y/y capex spending by utilities, regardless of stimulus funding.
(1-212) 622-8244 Alternative energy is President Obama’s second-highest domestic priority (behind
mark.w.strouse@jpmorgan.com healthcare), owing to the creation of “green jobs.” The transition to the smart grid
Marija Krgovic aids in this effort by creating jobs for infrastructure installations as well as data
(1-212) 622-5552 management.
marija.x.krgovic@jpmorgan.com
J.P. Morgan Securities Inc. U.S. stimulus spending of $3.4 billion is expected to begin flowing to utilities in
early January. The utilities receiving stimulus spending were selected in late
Avid Technology (AVID) ...............................N October and we expect these utilities to select vendors imminently, creating potential
Cogent Inc. (COGT)......................................N
catalysts for smart grid companies under coverage including Itron (ITRI/OW),
Cubic Corp (CUB).....................................OW
Digital Theater Systems, Inc. (DTSI)........ UW
Echelon* (ELON/N), and Esco Technologies (ESE/UW).
DigitalGlobe, Inc. (DGI).............................OW
DivX, Inc (DIVX)........................................OW
Forecasted GDP growth as well as resolution of stimulus grants should result in
Dolby Laboratories, Inc. (DLB) .....................N increased utility capex in 2010. Utility capex slowed significantly in 2009 owing to
Echelon Corporation (ELON)...................... N* the economic slowdown, but more importantly because of the stimulus which was
EnerNOC Inc. (ENOC)..............................OW announced in the spring but not awarded until October.
ESCO Technologies Inc. (ESE)................ UW
FLIR Systems Inc (FLIR) ..............................N The transition to the smart grid is expected to create “green jobs,” a high
Garmin Ltd. (GRMN).................................... rs priority for the Obama administration. Workers are required to install the
GeoEye, Inc. (GEOY) ...............................OW
infrastructure of the smart grid (e.g., smart meters) as well as to manage the large
ICx Technologies, Inc. (ICXT) ......................N
iRobot Corporation (IRBT)............................N
amounts of data that will be communicated once the smart grid is established.
Itron, Inc (ITRI)..........................................OW
Ituran Location and Control (ITRN) ..............N Best Idea
L-1 Identity Solutions (ID) .............................N Itron, Inc. is our top pick for 2010 for many reasons: 1) we believe the equity raise
LoJack Corp (LOJN) ................................. UW
NCR Corporation (NCR)...............................N
and debt repayment during 2Q09 reduce shareholder risk associated with debt
Nice Systems (NICE)................................OW servicing; 2) we assume a mild global economic recovery has started;
Novatel Wireless (NVTL) .......................... UW 3) the dollar has weakened against European currencies since early March, which
OmniVision Technologies (OVTI).............OW benefits Itron International; 4) stimulus spending should start to augment utilities
Palm Inc. (PALM)..........................................N investment activity in late 2009/early 2010; 5) announced U.S. AMI programs are
Plantronics Inc (PLT) ................................OW
expected to ramp imminently (SoCal Edison, CenterPoint, SDG&E, DTE); and
Sandisk Corp (SNDK)............................... UW
Sierra Wireless Inc. (SWIR)..........................N 6) backlog continues to build, and the competitive landscape appears stable. There’s
Synaptics Inc. (SYNA) ..............................OW a lot of momentum here.
TASER International Inc. (TASR).............OW
Trimble Navigation (TRMB) ...................... UW Itron, Inc (ITRI) – Overweight – Dec 10 Price Target: $70.00
Verint Systems, Inc. (VRNT) ........................N Price 52-Wk Range FY EPS P/E Mkt Cap
Zebra Technologies (ZBRA)..................... UW 12/01/2009 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Zoran Corp (ZRAN) ......................................N $61.81 $67.89 $40.10 Dec-09 $3.38 $1.77 $2.70 34.92 22.89 $2,480
* Rating for Echelon reflects initiation on December 3, 2009.
63
December 2009
Business Services
Temp Help Showing Spunk; Favor Growth-Cyclical Staffers as Fundamentals Improve
Andrew C. Steinerman AC U.S. temp help is finally showing more vitality as 2009 closes. Over the last
(1-212) 622-2527 several months (since April ’09), we have seen a series of second-derivative
andrew.steinerman@jpmorgan.com improvements in U.S. temp help as the y/y declines narrowed in a patterned way.
William W. Lee Most recently, the Bureau of Labor Statistics (BLS) showed November temp help
(1-212) 622-2596 popped a considerable 2.9% seq. on a seasonally adjusted basis and gives more
wlee2@jpmorgan.com credibility to the October breakout of a strong temp help lift. Revisions to earlier
Jeffrey Y. Volshteyn statistics now show a healthy recovery trajectory as September was up 1.0% seq.
(1-212) 622-2940 (from 0.4%) and October was up 2.5% seq. (from 1.9%). We are more confident that
jvolshteyn@jpmorgan.com
U.S. temp help headcount could achieve year-over-year growth in early 2010 and
J.P. Morgan Securities Inc. likely ahead of France/Europe. We maintain that temp help is concurrent with the
economy and a leading read on the labor market. When the economy passes the
American Reprographics Company (ARP)...N
bottom, we have observed that companies increasingly use temp help to move
CDI Corp. (CDI) ............................................N
Cintas (CTAS)...........................................OW forward while preserving flexibility in their workforce. In the last five recessions,
G&K Services (GKSR).............................. UW temp help, on average, troughed two months ahead of nonfarm payroll.
Iron Mountain (IRM)..................................OW
Manpower Inc (MAN)....................................N As we look increasingly to a prospective economic expansion, we believe the temp
MPS Group (MPS)........................................N help secular story remains intact and expect the industry to exceed prior peaks if the
Resources Global Professionals (RECN).....N cycle is of decent length. We anticipate temp staffers return to y/y growth in early
Robert Half International (RHI) .................OW 2010. We note that real GDP growth of at least 2.25% in the U.S. is necessary to
Spherion Corporation (SFN)..................... UW
UniFirst (UNF)...............................................N
sustain a healthy fundamental recovery in the staffing industry and our J.P. Morgan
economics team is looking for healthy real GDP growth in 2010 and 2011.
Europe is getting its second wind. Most recently, we have observed the rate of
recovery in the broader European temp markets (e.g., France, Germany, Belgium,
and Italy) improve, following consolidation of their faster gains from the summer.
We point out that European markets require a lower threshold of real GDP growth to
drive a fundamental recovery in temp staffing, in our opinion.
We favor the growth-cyclical staffers as these stocks should continue to

outperform the broader market. Our J.P. Morgan staffing stock index to date has
rocketed ~90% off the very low March ’09 bottom (much more than the ~60% lift by
the S&P 500) but still 46% below the July ’07 peak. We expect the growth-cyclical
staffers to continue to greatly outperform the market over the next expansionary
cycle. However, we note that if the labor recovery (notably from small/medium
businesses) were to stall, the staffing stocks would retrench.
Best Idea
RHI is our preferred horse among the staffing/professional services stocks. The
RHI stock currently is trading at 1.0x trailing price/sales, which is still below its prior
recessionary trough multiple of 1.1x in March ’03 and way below its median
multiple of 1.7x during the ’02-’07 expansion. We believe in the upcoming economic
expansion, RHI will grow faster and have higher margins than other staffers given its
dominating presence in accounting staffing and its focus on middle-market clients.
We also favor RHI’s focus on professional temp staffing as this underpenetrated
segment (vs. commercial temp staffing) should garner more adoption by end users.
Robert Half International (RHI) – Overweight – Dec 10 Price Target: $31

$22.75 $28.06 $14.06 Dec-09 $1.63 $0.20 $0.52 113.75 43.75 $3,435
64
December 2009
Communications Equipment
Year of the Cheap Smartphone; Lukewarm on Infrastructure
Rod Hall, CFA AC Several macroeconomic indicators—consumer confidence and spending, U.S. retail
(44-20) 7325-7437 sales data—have shown signs of improvement lately, but unemployment continues to
rod.b.hall@jpmorgan.com grow and a lot of consumer debt still looks like it needs to be cleared through the
Malvika Gupta system. For our handset forecast we assume that 2010 is a year of stability when
(44-20) 7742 0939 compared with late 2008 and 2009. In addition to the macro backdrop, we expect
malvika.x.gupta@jpmorgan.com 2010 to be characterized by strong volumes and weak ASPs. For smartphones, we
J.P. Morgan Securities Ltd. expect low-cost platforms and heightened competition to reduce pricing to US$100-
150 levels, negatively impacting vendor ASPs and margins. We count 54 new
Rod Hall:
smartphone launches in H2 2009 compared with 19 in H2 2008, offering consumers
Alcatel-Lucent (ALUA.PA) ........................OW
Ericsson (ERICb.ST) ................................ UW a wider choice but increasing competitive pressure at the same time. The focus in
Nokia (NOK1V.HE) .......................................N smartphones has shifted strongly to the software and services platforms that go along
Research in Motion (RIMM)..........................N with them. In the low-end handset segment, we expect MediaTek to become a bigger
Tellabs (TLAB)..............................................N threat as MediaTek-based handsets quickly proliferate into emerging markets like
India, which are core for Nokia. Exclusive handset deals have also begun to wane in
Malvika Gupta: importance as devices proliferate and regulators scrutinize these relationships more
TomTom NV (TOM2.AS) ..............................N
closely. We believe this is positive for market volumes but negative for vendors with
less competitive products.
For infrastructure, we believe 2010 will be characterized by slower-than-expected

growth due to excess network capacity, corporate action, and alternative wireless
access investments as telecom operators continue to optimize their network spend.
Mobile data growth is expected to accelerate further as cheaper devices and data
price plans proliferate. However, we continue to believe that telcos have sufficient
network capacity to absorb most of this growth. Recent data from Vodafone lead us
to believe that our assumptions for capacity utilization are likely to be too
conservative, implying even later spend than we are currently forecasting. One offset
could be in H2 2010 when we could see a pickup in capacity spending post spectrum
auctions in the UK and Germany. Another emerging trend we expect is an increased
deployment of alternative access technologies like WiFi and femtocells, negative for
equipment vendors. In 2009, Nokia Siemens Networks has taken a turn for the worse
with Chinese vendor Huawei making strong inroads in the wireless networks
market—a trend we expect to see in 2010 as well. This has potentially been
exacerbated by the marked slowdown in carrier capex through the year, which we
began highlighting as an issue in January 2009.
Best Idea
Ericsson is our top stock to avoid. We expect the negative carrier capex story to spill
into early 2010 and expect more competition from Chinese vendors. There is hope
for capacity spending late in 2010, but we are increasingly concerned that pricing
pressure could partly offset this.
Ericsson (ERICB SS) – Underweight – Dec 10 Price Target: Skr 62

Skr 67.9 Skr 79.6 Skr 52.1 Dec-09 Skr 4.72 Skr 3.38 Skr 4.79 20.09 14.18 Skr 222,182
65
December 2009
Communications Infrastructure Technology

ShoreTel Is Best Positioned for Rebounding Enterprise Equipment Spending
Steven O’Brien AC Enterprise equipment spending likely will respond more quickly to the
(1-212) 622-6554 rebounding global economy vs. carrier spending. Enterprises were quick to pare
steven.obrien@jpmorgan.com back IT budgets starting in Q308, while carrier capex continued to grow 7% q/q in
J.P. Morgan Securities Inc. 4Q08, as carriers had less ability to shut down long-term projects. Looking back to
the last recession, carrier capex substantially lagged the economic recovery and
ADC Telecommunications (ADCT)........... UW
declined each year from 2001 through 2003, and would not have rebounded in 2004
Cisco Systems (CSCO) ................................N
CommScope (CTV) ..................................OW were it not for global 3G wireless deployments. We expect the same pattern to hold
Powerwave Technologies (PWAV)...............N in a 2010 economic recovery with quick-to-rebound enterprise spending—as
QUALCOMM (QCOM)..............................OW highlighted by the J.P. Morgan GDP growth forecast calling for healthy business
ShoreTel (SHOR) ....................................OW* equipment investment—and continued weak carrier spending.
In contrast to the 2004 carrier capex upturn, initial 4G deployments in 2010 are
not likely to drive incremental carrier spending, in our view, but rather a spending
shift within budgets.
Best Idea
Overweight-rated ShoreTel is our top pick for 2010 and we believe it is poised to
benefit from both a global economic and enterprise spending recovery, which should
result in stabilizing IP telephony system demand in 2010 followed by steady market
growth in 2011 and 2012. Within the context of a stabilized IP enterprise voice
industry, we believe ShoreTel has strong potential for market share gains driven by
its compelling all-IP solution which simultaneously enables low-cost IP
internetworking with feature-rich Unified Communications and best-in-breed ease of
installation and maintenance.
Key demand metrics have started turning in the right direction as revenue from
new customers contributed 45% of Q1’10 (Sep) revenue, up from a low of 41% in
Q3’09 (Mar). International revenue, while still a small 10% overall contributor, grew
50% q/q and over 100% y/y in Q1 2010.
At a steep discount to peers at just 0.7x CY’11E revenue vs. peers at 1.4x, the
current valuation, in our opinion, does not reflect ShoreTel’s innovative all-IP
solution, its industry-leading mid-60s gross margins, or its strong balance sheet with
$111.5m in cash ($2.50/share) and no debt.
ShoreTel (SHOR) – Overweight – Dec 10 Price Target: $8.00

Price 52-Wk Range FY EPS P/E Mkt Cap
$5.17 $9.22 $3.10 Jun-09 $0.03 ($0.14) ($0.08) N/M N/M $230
* Rating, price target, and estimates for ShoreTel reflect adjustments made on December 3, 2009.
66
December 2009
Computer Services & IT Consulting

Mixed Outlook for Defensive Group Given Economics/Strategy Views
Tien-tsin Huang, CFA AC Given the J.P. Morgan Economics and Strategy views for 2010, which call for solid
(1-212) 622-6632 economic growth with minimal job growth, and a rising stock market with
tien-tsin.huang@jpmorgan.com outperformance likely to come from high-beta stocks with strong balance sheets, we
David Cohen, CFA would expect our sector, which tends to be viewed as defensive, to record mixed
(1-212) 622-5338 performance. For the payment processors, we expect secular growth to return to more
david.e.cohen@jpmorgan.com normal levels, with minimal chances for volume upside without an improving
Reginald Smith employment picture. For the low-beta payroll/HR providers, economic growth even
(1-212) 622-6743 without an improving employment outlook would be neutral, in our view, as business
reginald.l.smith@jpmorgan.com
formation and client retention could improve and they are the key model drivers. For
Puneet Jain the Bank Processors, we would expect an economic recovery to support modest top-
(1-212) 622-1436 line growth (healthier banks and brokers should have more incremental money to
puneet.x.jain@jpmorgan.com
spend on IT and outsourcing), which would be a boon (and not currently in the
J.P. Morgan Securities Inc. stocks, in our view) on top of expected cost-cutting. For the IT and BPO Services
providers, we see a more favorable trend toward outsourcing and offshoring (absent a
Accenture Ltd. (ACN)................................OW
shock, we are of the view that the secular trends can overcome a contracting or
Affiliated Computer Services (ACS) ............ rs
Automatic Data Processing (ADP) ...............N softer-than-forecast economy) that should drive above-average growth for companies
Broadridge (BR)............................................N focused on delivering cost savings to clients. The real benefit, in our view, to a rising
Cognizant (CTSH) ....................................OW stock market for the IT and BPO Services providers is the opportunity to sustain or
Computer Sciences (CSC) ...........................N see an increase in multiples. However, we think there is a risk that much of the
ExlService Holdings Inc. (EXLS) .............. UW optimistic scenario may be priced into many of the stocks in our coverage.
FIS (FIS) ...................................................OW
Fiserv, Inc. (FISV).....................................OW
Genpact (G) ..............................................OW
Best Idea
Global Cash Access (GCA) ..........................N Given the J.P. Morgan Economics and Strategy views for 2010, which call for
Global Payments (GPN) ...........................OW economic growth and a rising stock market, our best idea is Cognizant (CTSH) for
Heartland Payment Systems (HPY) .............N
Hewitt Associates, Inc. (HEW)......................N
its premium growth and relatively low earnings risk. CTSH has consistently
MasterCard (MA) ......................................OW demonstrated the ability to outgrow the market through its investments in sales and
Paychex Inc (PAYX) ................................. UW marketing functions. We think the investments will continue to drive its premium
VeriFone (PAY).............................................N growth in 2010—we expect top-line growth in the mid-twenties in 2010 compared to
Visa Inc. (V) ..............................................OW low-teens growth for its peers. Furthermore, the company should also benefit from a
Western Union (WU).................................OW
secular trend towards both outsourcing in general and offshoring in particular, driven
WNS Holdings Ltd. (WNS) ...........................N
Wright Express (WXS)..................................N
by clients’ desire to capture lower IT costs. Finally, we think that CTSH can hold its
margins (of 19-20% on non-GAAP basis) steady given its lower exposure to Indian
rupee appreciation and potentially rising wages. In a growing economy and rising
stock market, we see little downside risk to the CTSH 2010E multiple (of 22x),
which represents a slight discount to current growth expectations. However, if the
economy deteriorates, we see risk of multiple contraction (although we still have
confidence in earnings absent another economic shock).
Cognizant (CTSH) – Overweight – Dec 10 Price Target: $45.00

$45.14 $45.75 $15.39 Dec-09 $1.44 $1.76 $2.04 25.65 22.13 $13,303
67
December 2009
Education Services
2010: Back to Fundamentals?
Andrew Steinerman AC We maintain our net positive view of the for-profit education services (4PES) sector.
(1-212) 622-2527 Overall, we continue to believe that education stocks provide a good balance of
andrew.steinerman@jpmorgan.com growth-defensiveness in a still uncertain economy and will show healthy (but much
Jeffrey Volshteyn decelerated) growth during an economic expansion, supported by secular drivers. We
(1-212) 622-2940 note that the sector now trades at 14x NTM P/E, close to the lowest level in a decade.
jvolshteyn@jpmorgan.com
William Lee While the 4PES sector has been out of favor for most of 2009 due to regulatory
(1-212) 622-2596 and countercyclical concerns, 2010 should be back to fundamentals. While
wlee2@jpmorgan.com fundamentals have been strong, stocks of education companies have underperformed
J.P. Morgan Securities Inc. the broader benchmarks (and closed down about 5% for the year) due to
1) regulatory/legislative uncertainty and 2) countercyclical concerns.
Apollo Group (APOL)................................OW
Bridgepoint Education (BPI) .........................N Regulatory/legislative worries should diminish in 2010. While 2009 has surely
Capella Education (CPLA)............................N been filled with regulatory chatter, we have found that the position of the Obama
DeVry (DV)....................................................N administration and Congress has so far been manageable for the industry. That said,
Education Management (EDMC)..................N
we are waiting for the outcome of the Education Department’s negotiated rulemaking
ITT Educational Services Inc (ESI) ..............N
Strayer Education (STRA) ........................OW
(known as neg-reg) around Title IV program integrity, which is due in 2010. So far,
the neg-reg process has been somewhat adversarial but is still early in its formation.
In our opinion, the most likely outcome would be measured, not step-like, changes
around disclosure and incentive compensation. We also think that Congress will be
satisfied with Education Department’s neg-reg outcomes. We believe that once the
regulatory items shift from the foreground to middle-ground, education services
stocks should lift.
Countercyclical concerns will persist in 2010, but growth should continue. 4PES
stocks are generally countercyclical, as the sector’s underlying enrollment growth
tends to accelerate in recessions. The current recession has been a fundamental
tailwind to the sector, and, as a result, a countercyclical headwind will arise when
labor markets improve in 2010. We think that secular drivers will maintain
intermediate-term sector revenue growth of 8-12%.
Best Idea
Apollo Group’s valuation appears extremely compelling. Shares of APOL trade at
10x our CY2010 estimate vs. the sector average of 13x. Our December 2010 price
target of $95 suggests 70% upside potential in the stock. We continue to like APOL’s
dominating market position, healthy growth/margin balance, and more consistent
execution under the new management.
We think that the recent 25% drop in the stock (since the SEC inquiry surfaced)
over-penalizes APOL for the sector’s regulatory concerns. We think that potential
changes in sector regulations are likely to be measured, not step-like, and Apollo has
been forward-thinking in terms of adjustments. As far as the SEC inquiry on revenue
recognition, management remains comfortable with its accounting compliance. To
the best of our knowledge, there does not seem to be a link between the remaining
Education Department actions (focused program review of APOL and neg-reg) and
the SEC inquiry, which reduces the probability of cash flow being affected.
Apollo Group (APOL) – Overweight – Dec 10 Price Target: $95.00

$55.81 $90.00 $52.79 Aug-10 $4.22 $5.26 $5.80 10.61 9.62 $8,641
68
December 2009
IT Hardware & Imaging

Apple Inc. Should Stand Above Muted Revenue Growth Expectations
Mark Moskowitz AC In 2010, we expect the IT Hardware sector to exhibit diverging rebounds in revenue
(1-415) 315-6704 growth. Storage and servers should benefit ahead of PCs and printers. Across most
mark.a.moskowitz@jpmorgan.com sub-segments, though, we anticipate revenue growth in the mid-single digits. This
Anthony Luscri muted growth profile could frustrate technology investors seeking bigger
(1-415) 315-6702 improvements climbing out of the global downturn. We do not expect major growth
anthony.s.luscri@jpmorgan.com spurts of the 12-15% variety. The consumer already has been spending, and
J.P. Morgan Securities Inc. enterprise capital investments could be measured owing to ongoing productivity
gains. High unemployment also could be a cross-current.
Agilent Technologies (A) ............................. rs
Apple Inc. (AAPL) .....................................OW Corporate IT budgets typically are not set in place until mid-1Q. As a result, we
Brocade (BRCD).......................................OW
expect storage and servers to exhibit a gradual recovery beginning in 2Q 2010,
Dell Inc. (DELL) ........................................ UW
EMC (EMC)...............................................OW followed by PC and printer demand later in the year. We expect enterprise systems to
Emulex Corp. (ELX)......................................N benefit first owing to higher utilization levels in storage and chip set–led refreshes in
Hewlett-Packard (HPQ) ............................OW servers. We believe storage revenue growth could be around 10%. Meanwhile, mix
IBM (IBM)..................................................OW and pricing should keep PC revenue growth in the mid-single digits. Servers could be
Lexmark International (LXK).........................N higher, but virtualization should limit any crossover to double-digit growth.
National Instruments (NATI) .....................OW
NetApp (NTAP).............................................N In the past year, enterprises have been more cautious with IT spending, whereas the
QLogic Corporation (QLGC)..................... UW
consumer returned to spending, albeit on lower-priced SKUs, in 2Q 2009. We
Seagate Technology (STX) ..........................N
STEC (STEC) ...........................................OW believe this divergence in spending patterns increases the dependence on the
Sun Microsystems (JAVA)........................ UW enterprise for driving any upside to the IT Hardware growth profile in 2010.
Voltaire (VOLT).............................................N
Western Digital (WDC) .................................N Best Idea
Xerox Corporation (XRX)............................. rs
Overweight-rated Apple (AAPL) is our top pick heading into 2010. We believe that
company-specific factors should contribute to a revenue growth profile capable of
moving into the mid-teens, which should have little rival. As a result, we expect
shares of Apple to retain a premium valuation multiple. The company’s Mac and
iPhone stories are the bright spots, and we expect the revenue contribution from
international to increase. In the September quarter, international growth decoupled
from that in the U.S., and we think this trend should continue with favorable results.
On the product front, Apple’s momentum in smartphones should remain intact owing
to the penetration of the China and Korea markets and also the potential of a second
wireless carrier in the U.S. The latter potential catalyst would support high-growth
potential for 2010-11.
Apple Inc. (AAPL) – Overweight – Dec 10 Price Target: $220.00

$196.97 $208.71 $78.20 Sep-10 $6.29 $7.16 $8.07 27.51 24.41 $177,235
69
December 2009
Semiconductors
Strength in PC/Wireless/Consumer Shifts to Communications/Industrial
Chris Danely AC Looking ahead to 2010, we believe inventory replenishment and upside to guidance
(1-415) 315-6774 should soon end for PC/wireless/consumer semiconductor stocks and investors will
chris.b.danely@jpmorgan.com rotate into semiconductor stocks with high communications and industrial end-
Venk Nathamuni market exposure, as those end markets have just begun inventory replenishment.
(1-415) 315-6783 Linear Technology, Xilinx, and Altera have the highest exposure to these end
venkatesh.r.nathamuni@jpmorgan.com markets combined with high margins.
Communication orders robust. Our checks with companies in the communications
Advanced Micro Devices (AMD)...................N supply chain indicate order rates from the enterprise networking end market have
Altera (ALTR)................................................N been stronger than expected. We also believe inventory in the communications
Analog Devices (ADI) ...................................N
supply chain is below normal. As a result, we expect strength in orders from the
Cypress Semiconductor (CY) ................... UW
Intel (INTC) ...................................................N overall communications end market to improve in 2010.
Linear Technology (LLTC)............................N
Maxim Integrated Products (MXIM).......... UW
Semiconductor margins close to the peak. We would note that 4Q09 gross margin
Microchip Technology (MCHP).....................N guidance from both Intel and Texas Instruments is within a few points of the peak for
National Semiconductor (NSM) ................OW each company. As a result, we believe both stocks offer a poor risk/reward tradeoff,
ON Semiconductor Corporation (ONNN) .....N as much of the upside potential has already been built into Consensus estimates.
RF Micro Devices (RFMD) ...........................N
Texas Instruments (TXN) .............................N PC upgrade cycle in 2010 already built into estimates. While many of the bulls
Xilinx (XLNX).................................................N and bears argue over whether or not there will be a PC upgrade cycle in 2010, we
would argue it is already reflected in Consensus estimates. We would note
Consensus y/y revenue growth for Intel for 2010 is roughly 12%, which would
translate to roughly 8% PC unit growth.
Time to transition. We expect investors will transition to semiconductor stocks with
high exposure to the communications/industrial end markets as inventory
replenishment ends in the PC/wireless/consumer end markets and accelerates in the
communications/industrial end markets. Companies with the largest exposure to the
industrial/communications end markets, such as Xilinx, Altera, Analog Devices, and
Linear Technology, should enjoy upside as the transition takes hold.
70
December 2009
Software
Software’s Offensive and Defensive Qualities Remain Attractive in a Tempered Recovery
John DiFucci AC Amid an economy that is expected to grow at a more moderate pace than in
(1-212) 622-2341 prior recoveries, we believe Enterprise Software companies represent attractive
john.s.difucci@jpmorgan.com investment opportunities given their offensive and defensive characteristics.
David Hafner
(1-212) 622-4071 If the U.S. and global economies do in fact continue their recovery in 2010 (albeit at
david.l.hafner@jpmorgan.com a more moderate pace than prior recoveries), software companies should benefit from
Giuseppe Incitti growth in new license sales, while also offering stability related to maintenance. We
(1-212) 622-4350 view new licenses similarly to any other manufactured product or service, sales of
giuseppe.x.incitti@jpmorgan.com which typically decline in bad times and grow during good times. We also note that
J.P. Morgan Securities Inc. while new license growth is desirable in its own right, it also comes with the benefit
of additional (sticky and profitable) maintenance that attaches to new licenses sales.
BMC Software, Inc. (BMC) ....................... UW
CA Inc. (CA)..............................................OW On the flip side, if the economy does not show the improvement currently expected
Citrix Systems, Inc. (CTXS)..........................N by Mr. Kasman, we continue to believe enterprise software companies, with their
LogMeIn (LOGM)......................................OW highly recurring, highly profitable maintenance streams, will be able to hold up their
McAfee (MFE)...........................................OW
bottom lines better than companies in most other sectors. In addition, following what
Microsoft (MSFT) ..........................................N
Novell Inc (NOVL).....................................OW
will likely turn out to be broad-based license declines in 2009, maintenance will have
Oracle Corp. (ORCL) ................................OW grown as a proportion of total revenue. This greater proportion of maintenance
PROS Holdings (PRO) .................................N revenue, coupled with efficiency gains resulting from cost control initiatives put in
Quest Software (QSFT)............................OW place this year, should enable software companies to show margin stability (if not
Red Hat Inc (RHT) ........................................N expansion) even if license revenue remained flat versus 2009’s depressed levels.
SolarWinds (SWI) .....................................OW
SYBASE, Inc. (SY) ...................................OW Finally, if the economy were to recover at a robust pace, more leverage might be had
Symantec (SYMC) ....................................OW
in other sectors besides software, as they would likely see a more dramatic change in
TIBCO Software Inc (TIBX) ......................OW
VMware (VMW) ............................................N total revenue growth, which may translate to a greater change in their bottom lines.
Best Idea
Though Symantec (SYMC) shares have staged a comeback recently, boosted by
solid September quarter results, they continue to represent a compelling opportunity
to enter a core value name in Software, in our opinion.
Catalysts—product cycle, gradually improving IT spending, and attainable

expectations. Though an area of relative weakness over the last few quarters,
SYMC’s storage business is likely to benefit from an upcoming product cycle
(Backup Exec 2010 and NetBackup 7.0 are expected by F10-end), giving SYMC
selling opportunities with new and existing customers via new features such as
deduplication. This product cycle, coupled with what we expect will be a modestly
improving IT spending environment, should lift SYMC’s operational results in the
December quarter and CY10 against what we view as very attainable expectations.
Trading below baseline valuation. We estimate enterprise maintenance revenue

(assuming flat maintenance) and the consumer business (assuming a 10% annual
decline in cash flow from this business) imply a baseline value of about $21, which
is also our DCF-based price target. Our DCF yields values of $21-35. In addition,
SYMC trades at an attractive TTM FCF yield of 9.8% excluding acquisitions, and
6.3% including the average cost of acquisitions over the past five years.
Stock (SYMC) – Overweight – Dec 10 Price Target: $21.00

$18.01 $18.19 $10.94 Dec-09 $1.57 $1.44 $1.51 12.51 11.93 $14,598
71
December 2009
Software Technology
Looking for Stocks Levered to Cyclical Recovery
Sterling Auty, CFA AC Two key forces will impact the software technology sector in 2010—growing GDP
(1-212) 622-6389 with improved spending, counter-balanced by continued high unemployment. The
sterling.auty@jpmorgan.com improved spending should benefit software technology companies that provide
Lauren Ye solutions that help companies generate incremental revenue. But high unemployment
(1-212) 622-6102 will dampen the recovery for application software companies that need a return to
lauren.c.ye@jpmorgan.com
job growth before seeing their full potential in a recovery. That being said, we favor
Saket Kalia, CFA companies tied to early-cyclical recovery including VeriSign and Cadence Design.
(1-212) 622-6477
saket.kalia@chase.com Best Idea
J.P. Morgan Securities Inc. The core reason we like VeriSign as our top pick heading into 2010 is that its main
two businesses are directly tied to economic recovery but not necessarily
Advent Software (ADVS) .......................... UW employment growth. Its naming business (~60% of total revenue) has already started
Akamai Technologies, Inc. (AKAM)..............N
Amdocs (DOX)..........................................OW
to turn the corner as the number of names added per quarter has bottomed and started
ANSYS, Inc. (ANSS).....................................N to grow sequentially. The SSL/Authentication business appears to lag the beginning
Ariba, Inc (ARBA) .........................................N of an economic recovery by one to three quarters, but we remain confident in
Autodesk (ADSK)..........................................N VeriSign’s competitive position and its ability to rebound with a pickup in economic
Blackbaud Inc (BLKB)...................................N activity, especially as it relates to new business creation and e-commerce growth.
Cadence Design Systems (CDNS) ..........OW
Check Point Software (CHKP)......................N • Naming business turned the corner. One metric that investors watch is the
Comverse Technology (CMVT) ....................N number of names added per quarter (net adds). In the September quarter, net
Mentor Graphics (MENT) .........................OW adds improved to 1.4m compared to declines the last five to six quarters. We see
Monotype Imaging (TYPE) .......................OW
Neustar (NSR) ..............................................N
this as a sign that net adds have bottomed and are starting to grow sequentially.
Parametric Technology Corp. (PMTC) .........N • SSL/Authentication to turn in 1H10. SSL certificates are correlated to
Rovi (ROVI)...............................................OW
e-commerce, in our view, but with a lag of one to three quarters. Given last
SonicWALL (SNWL) .....................................N
Syniverse (SVR) .......................................OW quarter’s results from Amazon, the e-commerce revenue of Akamai, and early
Synopsys Inc (SNPS) ...................................N online holiday shopping volume up 16%, that should put SSL/Authentication
VeriSign (VRSN).......................................OW recovery sometime in the March or June quarter. Investors have been concerned
Websense (WBSN)...................................OW about ASP (AUR is VRSN’s term) erosion, caused equally by single-digit
percentage discounting in the higher-end VeriSign brand with the poor economy,
and the cheaper Thawte and Geotrust branded SSL certs growing faster. As the
economy turns up, the market should start buying more higher-end VeriSign
branded certificates, stabilizing ASP and leading to faster revenue growth.
• Trust service and cloud computing security to add new revenue starting in
2010. In spring 2010 at the RSA Conference, we look for VeriSign to launch its
new trust services aimed at helping prevent online fraud. We believe this will
add $5-15m to 2010 revenue; when combined with security solutions for the
growing cloud computing industry, we expect as much as $100-150m in
incremental revenue over the following 2-3 fiscal years.
• Expect a pickup in share repurchase under $900m authorized plan. The
company finished 3Q09 with $1.4bn in cash, should receive $175m from
Syniverse for the sale of the messaging business, and generate at least $75-100m
in cash flow for Q4. The majority (60%) of cash is held domestically, and we
don’t believe the company needs more than $600m on the balance sheet to
effectively run the business, which would leave about $1bn available mainly for
share repurchase but also potentially a couple of small, tuck-in acquisitions.
VeriSign (VRSN) – Overweight – Dec 10 Price Target: $27.50
$22.58 $24.99 $16.89 Dec-09 $0.99 $1.29 $1.46 17.50 15.47 $4,343
72
December 2009
Stock ratings and prices of companies discussed in this report
Ratings and prices for analysts’ second half “best ideas” appear on the corresponding sector page.
Stock prices and ratings are as of the close, 01 December 2009.
Acorda Therapeutics Inc. (ACOR) - OW; $24.6 Peabody Energy (BTU) - N; $45.16
Aetna Inc. (AET) - OW; $29.82 People's United Financial (PBCT) - OW; $16.14
Agrium (AGU) - N; $56.97 Potash Corp. (POT) - N; $116.59
AK Steel (AKS) - OW; $20.67 Reinsurance Group of America (RGA) - OW; $46.85
Altera (ALTR) - N; $22 Reynolds American (RAI) - N; $50.84
Altria Group (MO) - OW; $19.07 Sherwin-Williams (SHW) - OW; $62.19
American Express (AXP) - N; $41.3 State Street (STT) - N; $42.72
Amgen Inc (AMGN) - OW; $57.08 Swedish Match (SWMA.ST) - UW; $152
Analog Devices (ADI) - N; $30.37 Target Corporation (TGT) - OW; $46.78
Arcelor Mittal (MT) - OW; $39.96 Terra Industries (TRA) - OW; $39
Arch Coal, Inc. (ACI) - OW; $20.8 Teva Pharmaceuticals (TEVA) - OW; $53.38
BancorpSouth (BXS) - N; $23.19 Texas Instruments (TXN) - N; $25.94
Bank of New York Mellon Corp. (BK) - OW; $26.95 Texas Roadhouse Inc. (TXRH) - OW; $10.37
BB&T Corporation (BBT) - N; $25.6 The Home Depot (HD) - OW; $28
Big Lots, Inc. (BIG) - OW; $23.46 The McGraw-Hill Companies (MHP) - OW; $30.32
Boeing Company (BA) - N; $53.72 The Mosaic Company (MOS) - N; $57.17
Cadence Design Systems (CDNS) - OW; $6.23 Toll Brothers (TOL) - OW; $19.45
Capital One (COF) - N; $38.09 Trustmark Corporation (TRMK) - N; $19
CF Industries Holdings, Inc. (CF) - N; $85.9 U.S. Bancorp (USB) - N; $24.34
Cigna Corp. (CI) - OW; $33.08 UAL Corp. (UAUA) - OW; $8.26
Citigroup Inc. (C) - OW; $4.1 US Airways Group, Inc. (LCC) - N; $3.69
Discover Financial Services (DFS) - N; $15.45 Verisk Analytics (VRSK) - OW; $27.78
Dollar Tree, Inc. (DLTR) - OW; $48.7 Vertex Pharmaceuticals (VRTX) - OW; $39.86
Dow Chemical (DOW) - N; $28.08 Wal-Mart Stores, Inc. (WMT) - OW; $54.75
DuPont (DD) - OW; $35.1 Warner Chilcott (WCRX) - OW; $25.52
Echelon Corporation (ELON) – N; $11.45* Watson Pharmaceuticals (WPI) - N; $37.55
ESCO Technologies Inc. (ESE) - UW; $34.63 WD-40 Company (WDFC) - OW; $32.4
Experian plc (EXPN.L) - OW; $589 WellPoint Inc. (WLP) - OW; $54.79
FedEx Corp (FDX) - OW; $85.88 Wells Fargo (WFC) - OW; $27.99
First Horizon National (FHN) - N; $13.64 Whitney Holding Corp. (WTNY) - N; $8.05
Gartner Inc. (IT) - OW; $19.41 Xilinx (XLNX) - N; $23.42
Genzyme Corporation (GENZ) - N; $51.11 YRC Worldwide (YRCW) - N; $1.18
Goodyear Tire & Rubber (GT) - OW; $14.11
H.B. Fuller (FUL) - OW; $20.47 * Rating for Echelon reflects initiation on December 3, 2009.
IHS, Inc. (IHS) – N; $49.97
Intel (INTC) - N; $19.66
Kohl's Corporation (KSS) - OW; $52.97
Lennar (LEN) - OW; $12.88
Linear Technology (LLTC) - N; $27.4
Lorillard Inc (LO) - N; $78.34
Macy's Inc. (M) - OW; $16.01
MB Financial (MBFI) - OW; $18.78
McDonald's (MCD) - OW; $63.54
Medivation (MDVN) - OW; $32.33
Merck & Co., Inc. (MRK) - OW; $36.88
Moody's Corp. (MCO) - OW; $23.4
Mylan Inc. (MYL) - OW; $18.23
Navios Maritime Holdings Inc. (NM) - OW; $6.08
Nokia (NOK1V.HE) - N; $8.91
73
December 2009
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December 2009
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North America Equity Research

US Year Ahead 2010

For a complete list of contributors

See page 74 for analyst certification and important disclosures.

Economics (Bruce Kasman) .........................................................................................5

Equity Strategy (Tom Lee)............................................................................................7

Accounting & Valuation (Dane Mott) ............................................................................8

Aerospace & Defense (Joseph B. Nadol III) .................................................................9

Airfreight & Surface Transportation (Thomas R. Wadewitz) .......................................10

Electrical Equipment & Multi-Industry (C. Stephen Tusa, Jr.).....................................11

Engineering & Construction (Scott Levine).................................................................12

Environmental Services (Scott Levine).......................................................................13

Machinery (Ann Duignan)...........................................................................................14

Marine Transportation (Jonathan B Chappell)............................................................15

Airlines (Jamie Baker) ................................................................................................17

Autos, Auto Parts, Tires, and Dealers (Himanshu Patel)............................................18

Beverages (John Faucher) .........................................................................................19

Building Materials (Mike Betts) ...................................................................................20

Gaming (Joseph Greff) ...............................................................................................21

Homebuilding & Building Products (Michael Rehaut) .................................................22

Household Products & Personal Care (John Faucher)...............................................23

Lodging (Joseph Greff)...............................................................................................24

Packaged Food (Terry Bivens)...................................................................................25

Restaurants (John Ivankoe) .......................................................................................26

Retailing – Broadlines & Department Stores (Charles Grom).....................................27

Retailing – Food (Charles Grom)................................................................................28

Retailing – Hardlines (Christopher Horvers) ...............................................................29

Tobacco (Erik Bloomquist) .........................................................................................30

Electric Utilities & Independent Power Producers (Andrew Smith).............................31

Oil & Gas Exploration & Production (Joseph Allman) .................................................32

Banks – Large Cap (Vivek Juneja) .............................................................................33

Banks – Mid-Cap (Steven Alexopoulos) .....................................................................34

Brokers, Asset Managers & Exchanges (Kenneth B. Worthington)............................35

Insurance – Life (Jimmy Bhullar) ................................................................................36

Insurance – Non-Life (Mathew Heimermann).............................................................37

REITs/Real Estate Services (Michael W. Mueller / Anthony Paolone) .......................38

Specialty & Consumer Finance (Andrew Wessel) ......................................................39

Biotechnology (Geoffrey Meacham) ...........................................................................41

SMid Biotechnology (Cory Kasimov) ..........................................................................42

Healthcare Facilities (John Rex).................................................................................43

Healthcare Technology & Distribution (Lisa Gill) ........................................................44

Managed Care (John Rex) .........................................................................................45

Medical Technology & Devices (Michael Weinstein) ..................................................46

Pharmaceuticals – Major (Chris Schott) .....................................................................48

Pharmaceuticals – Specialty (Chris Schott)................................................................49

Base Metals & Steel (Michael F. Gambardella)..........................................................51

Coal (John Bridges)....................................................................................................52

Chemicals (Jeffrey J. Zekauskas) ..............................................................................53

Gold & Precious Metals (John Bridges)......................................................................54

Paper & Packaging (Claudia Shank Hueston)............................................................55

Media & Telecommunications

Advertising & Publishing (Alexia Quadrani) ................................................................57

Entertainment (Imran Khan) .......................................................................................58

Information Services/TV & Radio Broadcasting (Michael Meltz).................................59

Internet (Imran Khan) .................................................................................................60

Telecom Services (Michael McCormack) ...................................................................61

Applied Technologies (Paul Coster) ...........................................................................63

Business Services (Andrew Steinerman) ...................................................................64

Communications Equipment (Rod Hall) .....................................................................65

Communications Infrastructure Technology (Steven O’Brien)....................................66

Computer Services & IT Consulting (Tien-tsin Huang) ...............................................67

Education Services (Andrew Steinerman) ..................................................................68

IT Hardware & Imaging (Mark Moskowitz)..................................................................69