September 20, 2010 Directors DESKTOP Our framework With the macroeconomic environment increasingly uncertain, we remain committed to buying yield, and also advocate searching for growth. Beyond that we remain tactical in our approach, with a focus on capital allocation to help generate alpha. Continue to buy yield… Building on a strategy we began in November 2009, we continue to seek out yield. We are buyers of stocks that combine high yields and dividend growth. We also turn our focus to companies where dividend yields exceed bond yields, among other strategies. Our top income ideas are BMY, CBL, CTL, SXL and T. …while also buying growth We seek out companies with the potential to outgrow peers regardless of the economic environment, as well as those levered to global growth. Scarce in number but high in potential we are buyers of CMI, LULU, SAPE and SBAC as well as the Mobility and Aerospace themes. Our tactical tilt favors capital allocation A combination of macro fears and policy uncertainty has driven total cash balances up over 40% in the last two years. We believe this cash will be put to work and focus investors on: - M&A. We recommend our GSRHACQN basket of potential M&A targets and identify stocks with IRRs over 15%. - Buybacks. We highlight names with high authorizations relative to their market caps. - Special dividends. Ahead of potential tax law changes we screen for potential special dividend payers. The list includes MSFT, SNI and SYK. While we watch austerity and ag - Agriculture. With rising food inflation and shifting supply dynamics in proteins we see opportunity in CF, MON, BEEF3.SA and SFD. - Government austerity. We expect continued budget pressure across all forms of government. We sell our baskets of most exposed companies GSRHGOVT (all sectors) and GSRHGXHD (ex- healthcare and aero/defense). Anthony Carpet (212) 902-6758 [email protected]Goldman Sachs & Co. Laura Conigliaro (212) 902-5926 [email protected]Goldman Sachs & Co. Robert D. Boroujerdi (212) 902-9158 [email protected]Goldman Sachs & Co. Michael Chanin, CFA (646) 446-1777 [email protected]Goldman Sachs & Co. Deep Mehta (212) 357-8419 [email protected]Goldman Sachs & Co. Thomas Craven, CFA (212) 902-6748 [email protected]Goldman Sachs & Co. The Goldman Sachs Group, Inc. 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. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research September 20, 2010 Directors DESKTOP
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September 20, 2010
Directors DESKTOP
Our framework
With the macroeconomic environment
increasingly uncertain, we remain committed to
buying yield, and also advocate searching for
growth. Beyond that we remain tactical in our
approach, with a focus on capital allocation to
help generate alpha.
Continue to buy yield…
Building on a strategy we began in November
2009, we continue to seek out yield. We are
buyers of stocks that combine high yields and
dividend growth. We also turn our focus to
companies where dividend yields exceed bond
yields, among other strategies. Our top income
ideas are BMY, CBL, CTL, SXL and T.
…while also buying growth
We seek out companies with the potential to
outgrow peers regardless of the economic
environment, as well as those levered to global
growth. Scarce in number but high in potential we
are buyers of CMI, LULU, SAPE and SBAC as
well as the Mobility and Aerospace themes.
Our tactical tilt favors capital allocation
A combination of macro fears and policy
uncertainty has driven total cash balances up over
The Goldman Sachs Group, Inc. 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. For Reg AC certification, see theend of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
September 20, 2010
Directors DESKTOP
September 20, 2010 Americas
Goldman Sachs Global Investment Research 2
Table of contents
Portfolio manager summary 3
Snapshot of our coverage views 5
Macro corner 6
The search for yield 7
Finding growth in single stocks and themes 12
Cash balances continue to balloon – what now? 16
Government Corner: Watching budget proposals and mid-term elections 21
Demographic opportunities 23
Current Americas sector views: Commodities 24
Current Americas sector views: Consumer 25
Current Americas sector views: Financials 26
Current Americas sector views: Healthcare 27
Current Americas sector views: Industrials 28
Current Americas sector views: TMT 29
Latin America – Brazil domestic and export momentum 30
Updating our volatility outlook for a more muted recovery 31
Americas Conviction List ideas 32
Appendix: Investment Profile Methodology 33
Stock selections in this document are based on individual analyst criteria.
Prices in this document are based on the market close of September 16, 2010, except where noted.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 3
Portfolio manager summary
Against a backdrop of low interest rates and a recovery which is uneven and L-shaped in nature we choose not to
complicate our positioning. Our framework is “barbell” in nature, whereby we seek out income in the form of high-yielding
stocks and buy growth where the trajectory of the business is independent of macroeconomic trends and/or plays to rising
global growth. Outside these two distinct views we advise clients to be tactical in their security selection, focusing on
businesses where capital allocation decisions present opportunities and where companies exhibit some form of accelerating
growth.
Coloring this view is the lack of inflows into domestic equity funds this year, which is driving investors to sell a name to buy a name
as they remain pretty close to fully invested. Indeed, with YTD domestic equity fund flows (through September 15) of -$50.1 billion
versus -$39.4 billion in all of last year (per Investment Company Institute), the flow tailwind to appreciation appears limited. With
that said, we like our money upfront (dividends) and favor scarcity value found in growth names.
Keeping it simple
Continue to buy yield…
An opportunity to benefit from increased income to compensate for historically low interest rates remains at the forefront of our
recommendation set. We provide a list of strategies by which our analysts estimate high dividend yields and sustainable payouts.
Yield plus dividend growth. We recommend owning a group of Buy-rated stocks with above-average yields, dividend growth,
strong cash flows and low leverage, including Century Link, Home Depot and KLA-Tencor, among others.
Dividend versus bond yield. We leverage information from the bond market to identify equities with dividend yields that are
likely to represent compelling risk/reward scenarios, such as Buy-rated AT&T, Bristol Myers and Philip Morris International.
…while also buying growth
For the intermediate to long term, we believe investors can: (1) invest in mobility, where we see an inflection coming in 4Q2010;
and (2) buy Aerospace, where positive cyclical fundamentals combine with unique secular drivers. In addition, we also identify
company-specific growth stories across our coverage by using the following strategies:
High growth. We highlight companies with consistently strong revenue growth and expanding operating margins. These
growth leaders include CL-Buy rated Cummins, Sapient and SBA Communications, as well as Buy-rated lululemon athletica.
Global growth. We look at companies that are levered to global growth and utilize our proprietary Investment Profiling (IP)
growth score to identify standouts. Our list includes CL-Buy rated Amazon and Boeing, and Buy-rated Citicorp.
Our tactical tilt favors capital allocation
A combination of macro fears and policy uncertainty coupled with healthy profits has pushed total cash balances across our
coverage up 40% over the last two years, and total cash as a percentage of enterprise value to 9.3% from 5.5%. This provides
companies with the ability to aggressively address capital allocation decisions.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 4
M&A is real. Historically high cash balances, a benign credit environment, compelling IRRs and $500 billion of dry powder with
private equity, all make M&A an attractive proposition. We recommend two sets of strategies to monetize the M&A revival:
M&A target basket. Our refreshed 108-name basket (Bloomberg: GSRHACQN1) consists of names for which our analysts
see more than 15% chance of take out over the next twelve months.
IRRs over 15%. We run an LBO analysis across our coverage and showcase 86 names with IRRs over 15%.
Buybacks: More than a “needle mover”. We identify a list of stocks that have the highest remaining repurchase authorizations
as a percentage of their market cap. For these names, which include Buy-rated Home Depot, and Neutral-rated Aon and
Novellus, the completion of existing programs has the potential to drive significant EPS and upside accretion.
Special dividends. With tax policy under review in Washington, we screen for potential special dividend payers on a purely
quantitative model. We identify Buy-rated Microsoft, and Neutral-rated Scripps Networks Interactive and Stryker among
others.
While we watch austerity and ag
Agriculture. With rising food inflation and shifting supply dynamics in proteins we see opportunity in CL-Buy rated CF
Industries and Monsanto, and Buy-rated Minerva and Smithfield Foods.
Government austerity. Despite the recently announced stimulus initiatives, we expect continued budget pressure across all
forms of government. We sell our basket of the most exposed companies: GSRHGOVT (all sectors) and a second basket
GSRHGXHD that excludes Healthcare and Defense stocks.
Our core long-term theme
Demographic dynamics. We revisit one of our department’s anchor themes: focusing on stocks tied to long-term demographic
trends – Retiring Baby Boomers, the expanding global middle class, and generational waves after the Baby Boom. See page 23
for more details.
1Note: The ability to trade this basket will depend upon market conditions, including liquidity and borrow constraints at the time of trade.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 5
Snapshot of our coverage views
Core to our departmental approach is the breakdown of coverage into six distinct business units: Commodities, Consumer/Retail,
Financials, Healthcare, Industrials and TMT. We analyze each sector with regard to its own drivers, valuation and place in the
business cycle. Each business unit includes multiple senior analysts responsible for the coverage of specific sector groups.
Since our last publication, dated April 12, 2010, we have made several changes to our coverage views (see Exhibit 1), including ten
coverage view downgrades and three upgrades. In addition, we have initiated or re-organized coverage, resulting in six new
coverage groups and views (noted in bold in the exhibit below).
Exhibit 1: Summary of our coverage group views Arrows indicate upgrades or downgrades since our previous publication on April 12, 2010
Large Banks Asset Managers InsuranceLife Internet Cable & SatelliteBrokers & Advisors Specialty Finance IT Consulting and Outsourcing Communications TechnologyBuilding Products IT Supply Chain & Components Information ServicesDiscount Brokers Media and Entertainment SMid-cap Internet and Entertainment
Homebuilders Semi Cap Equipment Transaction ProcessorsInsurance Brokers Semi Device Wireline Service CanadaInsurance Non Life Software Wireline ServicesMarket Structure Telecom Services: Towers
Mortgage InsuranceREITS
Trust Banks
September 20, 2010 Americas
Goldman Sachs Global Investment Research 6
Macro corner
We pay heed to our economists’ forecasts, which are above consensus on global and emerging market growth and below
consensus in the United States. Goldman Sachs’ Chief US Economist Jan Hatzius does not expect a double-dip recession,
but sees the risk of two consecutive quarters of negative GDP growth as being as high as 25-30%. We believe that
consensus forecasts that the United States will return to above-trend growth next year are too ambitious.
Our Economics team expects US growth to slow to a 1.5% (annualized) rate in the second half of 2010 and early 2011, driving
our full-year real GDP growth estimates of 2.6% for 2010 and 1.8% in 2011. This slowdown is driven by the waning contributions
of the inventory cycle and fiscal policy. We expect the Fed to initiate quantitative easing measures (QE2), most likely through
sizable purchases of Treasury securities, later this year or early in 2011.
Conversely, we expect growth outside the United States to be better than the market is pricing, especially in BRICs nations and
emerging economies. For BRICs in aggregate we see 8.9% real GDP growth in 2010 and 8.7% in 2011, and our global growth
forecast is 4.8% in 2010 and 4.6% in 2011. See Exhibit 2.
In China, inventory restocking and shifts in policy implementation likely contributed to the growth rebound in August, and we
expect CPI inflation to moderate as food prices normalize along with weather conditions. We believe that the bottoming of the
credit cycle will prove an important catalyst for rebuilding investment confidence, and against this backdrop we forecast a
return to what we believe to be the country’s trend real GDP growth rate of 10% in 2011. See Exhibit 3.
Exhibit 2: Goldman Sachs versus consensus real GDP growth As of September 16, 2010
Exhibit 3: China’s export growth has been driven by demand outside the G-3 Percentage point contribution to yoy China exports growth
World 2.6 -0.6 4.9 4.7 4.6 4.2* Consensus Economics September 2010
2010 2011
-15
-10
-5
0
5
10
15
20
25
30
97 98 99 00 01 02 03 04 05 06 07 08 09 10
USA
EU
Developed Asia*
Rest of the world
ppt, 3mma
* Developed Asia includes Japan, Korea and Taiwan.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 7
The search for yield
We first highlighted various strategies for investing in stocks with high dividend yields in our report “SPOTLIGHT SERIES:
Dividends” published on November 12, 2009, and continue to recommend this trade. In this report, we refresh our analysis
and provide specific names for investors searching for high and sustainable yields amid a challenging economic
environment.
With rates remaining low and the Fed staying accommodative, the opportunity to benefit from increased income remains at the
forefront of our recommendation set. To that end we list several dividend strategies to take advantage of this theme. To help better
frame the current opportunity we step back and provide a snapshot of S&P 500 returns with and without dividends to highlight how
income has contributed to the performance of stocks over various time periods in the last 20 years (see Exhibit 4). Amid the slowing
economic environment and historically high cash balances in corporate America (discussed in depth on page 16), we believe that
investors should continue to invest in companies whose dividend payouts will drive shareholder returns.
Exhibit 4: Dividends enhanced S&P 500 returns across different time horizons
S&P 500 vs. S&P 500 Total Returns Index performance
Exhibit 5: Fixed income yields remain low by historical standards
Yields for selected securities
Source: Bloomberg.
Source: Federal Reserve, Bloomberg, Bankrate.com.
Dividends are an important component of total return for the stocks under our coverage. This is particularly reflected in the YTD
total returns of MLPs, Utilities, Telecom Services and Consumer Staples stocks, which were significantly enhanced by dividend
returns (see Exhibit 6). We carve out MLPs and REITs separately from Energy and Financials for the purpose of this analysis, given
that they either cater to a select investing audience, or have unique tax considerations.
In Exhibit 7, we list the top ten sub-sectors under our coverage ranked by average 2011E dividend yield. We note that the average
yield for six out of these ten sub-sectors is more attractive compared to the current 10-year treasury yield of 2.77%.
S&P 500 with dividends (Total Returns Index)
S&P 500 without dividends (Price Index) Total Returns Premium
Last 20 years 439.3% 255.0% 184.3%
Last 10 years ‐7.5% ‐23.3% 15.8%
Last 5 years 1.0% ‐9.2% 10.1%
Since March 9, 2009 (recent lowpoint)
71.7% 66.2% 5.5%
Last 12 Months 7.4% 5.2% 2.2%
YTD 2.3% 0.9% 1.5%
Security Yield3 month Treasury 0.16%90‐day AA non‐financial commercial paper 0.24%1 year Treasury 0.25%3‐month LIBOR 0.29%90 day asset‐backed commercial paper 0.31%1‐year LIBOR 0.82%10 year TIPS 0.97%1 year CD 1.21%S&P 500 2.01%3 Year CD 1.16%10 year Treasury 2.77%ML Investment Grade Corporate Bond Index 3.86%
September 20, 2010 Americas
Goldman Sachs Global Investment Research 8
Exhibit 6: Dividends form an important part of sector total return in particular
for REITs, MLPS, Staples, Telecom and Utilities % YTD Sector-average Price and Dividend returns for our rated coverage universe
Exhibit 7: Dividend Yields of the top 10 sub-sectors under our coverage vs.
current 10-yr treasury yield 2011E Dividend yield calculated for sub-sectors where at least 50% companies pay
a dividend
Source: FactSet, Goldman Sachs Research estimates.
Source: Bloomberg, Goldman Sachs ECS Research, Goldman Sachs Research estimates.
For investors searching for high and sustainable yields, we recommend two core strategies, namely stocks where our analysts
estimate high yields with dividend growth and sustainable payouts; and companies with estimated dividend yields that surpass
their bond yields. We provide a separate list with top yields for buy-rated names in REITs and MLPs.
Yield Strategy #1: Yield plus dividend growth
We recommend buying a group of names with above-average yields that have shown an ability to grow dividends and that possess
a balance sheet that allows for sustainable payouts (see Exhibit 8). To this end, we have screened our coverage with the following
criteria:
Dividend yield for 2011E greater than the current 10-year treasury yield of 2.77%.
We remove companies that cut dividends in 2010.
Include only those names that our analysts expect will grow dividends in 2011.
Cash flow is necessary to maintain sustainable dividend growth; we exclude companies with FCF yields below 5%.
Weak balance sheets limit both the capacity and propensity to pay and raise dividends; we remove companies with net
debt/equity greater than 100%.
Exhibit 8: Yield plus dividend growth
For important disclosures, please go to http://www.gs.com/research/hedge.html. For methodology and risks associated with price targets, please see analysts’ previously published research.
Source: Goldman Sachs Research estimates.
Yield Strategy #2: Dividend yields that surpass bond yields
We leverage information from the bond market to identify equities with dividend yields that are likely to represent compelling
risk/reward scenarios. Continued strength in the bond market has driven corporate bond yields to 40-year lows, especially for many
high-quality dividend paying companies. Low bond yields affirm that fixed income investors see cash flow as ample to pay the
debts of a firm over the next several years. This cash flow cushion observed by credit investors could be used to support future
dividend increases as well.
In Exhibit 9, we highlight names where dividend yields appear attractive relative to bond yields based on the following criteria:
• Dividend yield is above the yield to maturity on the closest to a 5-year senior non-convertible note.
Ticker Company Name Sector Rating Market Cap Price Target Price Upside to Target Price Div Yield DPS Growth DPS Growth FCF Yield Net debt/Equity($ mn) ($) ($) Target Price Period 2011E 2010/09 2011/10 2011E 2011E
• Our equity analyst expects the company to continue to maintain or increase the dividend in 2011.
• Our equity analyst rates the equity Buy or Neutral and sees upside to their 6- or 12-month price target.
Exhibit 9: We see strong risk/reward in dividend yields that are above bond yields Estimated 2011 dividend yield based on analyst estimates; market observed corporate bond yield for the closest to a 5 year senior note
Source: Bloomberg, Goldman Sachs Research estimates.
Yield Strategy #3: High yielding MLPs and REITs
MLPs and REITs have among the highest sector average 2011E dividend yields in our coverage universe at 6.4% and 3.8%,
respectively. Given their structure and tax or contractual requirements, MLPs and REITs have a high degree of visibility on near-term
distributions, a key reason for their YTD outperformance in an uncertain economic environment.
We note that MLP distributions are subject to ordinary income tax rates, and any negative adjustment to tax policy as a result of
expiration of Bush-era tax cuts, where dividends are subject to 15% tax rate, may cause yield-oriented investors to rotate into this
sector due to the increased relative attractiveness of MLPs.
We provide below a list of highest yielding Buy-rated MLPs and REITs in Exhibit 10.
Exhibit 10: Top yields for Buy-rated MLPs and REITs Stocks with 2011E dividend yield above 4% based on analyst estimates
Source: Goldman Sachs Research estimates.
Equity Market Current Equity Target Upside to Target Price vidend Yie Bond yield Dividend yield - Div GrowthTicker Company name Sector Rating cap ($m) Price Price Target Price Period 2011E 5 year 5y Bond Yield 2011/2010MO Altria Group, Inc. BevFoodTobacco Neutral 48,583 $23.47 $24.00 2% 12 months 6.9% 2.8% 4.1% 6.1%CTL CenturyLink Inc. TelecomTower Buy 11,447 $38.08 $42.00 10% 12 months 7.8% 4.1% 3.7% 3.0%VZ Verizon Communications TelecomTower Neutral 88,824 $31.42 $32.00 2% 12 months 6.4% 2.8% 3.6% 3.8%T AT&T Inc. TelecomTower Buy 166,102 $28.11 $34.00 21% 12 months 6.4% 2.8% 3.6% 7.0%PM Philip Morris International Inc. BevFoodTobacco Buy 104,985 $55.11 $58.00 5% 12 months 5.1% 2.7% 2.4% 14.9%EXC Exelon Corp. Utilities Neutral 27,897 $42.14 $44.00 4% 12 months 5.2% 2.8% 2.4% 3.0%BMY Bristol-Myers Squibb Company Pharma Buy 46,215 $26.95 $30.00 11% 12 months 4.8% 2.7% 2.1% 2.0%PFE Pfizer Inc. Pharma Buy 138,453 $17.17 $19.00 11% 12 months 4.7% 2.6% 2.1% 12.5%COP ConocoPhillips Integrated Oil/Refining Neutral 82,119 $55.36 $57.00 3% 6 months 4.2% 2.6% 1.6% 9.5%AEP American Electric Power Utilities Neutral 17,208 $36.00 $37.00 3% 12 months 5.0% 3.5% 1.5% 7.8%
C Company Name Sector Rating Market Cap Price Target Price Upside to Target Price Div Yield DPS Growth DPS Growth FCF Yield Net debt/Equity($ mn) ($) ($) Target Price Period 2011E 2010/09 2011/10 2011E 2011E
We readily acknowledge that the environment for paying dividends and the treatment of sentiment towards these strategies relies
on outcomes of tax code policy in Washington. While we are not taking a stance on political outcomes, we do highlight (in a
scenario setting) what the after-tax dollar amount of a dividend is on a 15%, 20%, 25% and 39.6% federal tax rate for the top 25
dividend yields in our Buy/Neutral rated Coverage (see Exhibit 11). We exclude state and local taxes from this analysis and base our
scenario analysis on the current level of taxation, two of the more widely discussed levels, and finally what the rate would be if
nothing was done to tax code. This is for purposes of comparison only. We also note that the current pre-tax yield for a 10-year
treasury is 2.77%.
Exhibit 11: Dividend yields in different tax scenarios
Top 25 dividend yields (ex MLPs, REITs) for Buy/Neutral-rated stocks in our coverage under a 15%, 20%, 25% and 39.6% tax rate scenario
Source: Goldman Sachs Research estimates.
Ticker Company Sector Rating Last Price Div Yld After tax Yld After tax Yld After tax Yld After tax YldPre-tax C2011E 15% tax rate 20% tax rate 25% tax rate 39.6% tax rate
Against the backdrop of macro economic fear and slowing US GDP growth, we believe there are ample opportunities to
invest in companies with superior growth profiles. Such stocks include names that outgrow their sector peers during
economic duress, are product cycle winners and are levered to global growth. We present several intermediate and long-
term strategies.
Growth Strategy #1: High long-term growth
We highlight growth leaders – the companies we expect to have among the highest growth and margin expansion over the next
three years (see Exhibit 12). We screen for Buy-rated companies where our analysts have forecast revenue and operating profit
growth in excess of 10% in each of the next three years.
Exhibit 12: Companies we believe will have the highest growth in the coming years Buy-rated companies with expanding operating margins and sales and EBIT growth in excess of 10% through to 2012.
Source: Goldman Sachs Research estimates.
Growth Strategy #2: Global growth
Across our coverage, we favor stocks that are levered to global growth, especially to BRICs where Goldman Sachs economists
forecast 8.9% and 8.7% real GDP growth in 2010 and 2011 respectively, versus 2.8% and 1.6% for the United States. To identify these
names we screen for Buy-rated companies with the high international exposure (specifically over 15% exposure to Asia), and
leverage our Investment Profiling (IP) framework to identify names with an IP Growth score in the top 30% of our coverage universe
(See appendix for IP scores calculation methodology). We exclude ADRs and oil-related stocks (see Exhibit 13).
Exhibit 13: Internationally exposed companies with high IP growth score
Buy-rated companies with the international exposure and IP Growth above 70thth percentile (See appendix for IP scores calculation)
Ticker Company Name Sector Rating Market Cap Price Target Price Upside to Target Price Sales-Asia (%) Sales-EMEA (%) IP Growth($ mn) ($) (S) Target Price Period Percentile
KLAC KLA-Tencor Semiconductors Buy 5,323 31.08 41.00 32% 6 months 71% 7% 80QCOM QUALCOMM, Inc. Comm Tech CL-Buy 68,915 41.97 46.00 10% 12 months 68% 17% 79BUCY Bucyrus International Inc. Machinery Buy 5,568 69.12 70.00 1% 12 months 29% 12% 77C Citigroup Inc. Banks Buy 116454.00 3.97 4.60 16% 12 months 22% 29% 73JNPR Juniper Networks, Inc. Comm Tech CL-Buy 16,028 29.74 32.00 8% 12 months 20% 29% 77AMZN Amazon.com Inc. Internet CL-Buy 67,399 148.13 150.00 1% 6 months 20% 28% 95ARUN Aruba Networks, Inc. Comm Tech Buy 2,276 20.92 20.00 -4% 12 months 19% 15% 99BA The Boeing Company Aer Defense CL-Buy 46,491 62.58 84.00 34% 12 months 18% 20% 78VMW VMware, Inc. Software Buy 35,797 84.76 105.00 24% 12 months 16% 32% 93
Last Reported Year
September 20, 2010 Americas
Goldman Sachs Global Investment Research 13
In addition to the quantitatively-derived, cross-sector opportunities above, we present three sector-specific themes that
offer intermediate- to long-term drivers.
Aerospace marries the cyclical to the secular
International air traffic and new aircraft order activity have both recovered, implying the next Aerospace cycle is underway. That
said, Aerospace also benefits from multiple unique secular drivers that can create differentiated growth: (1) the unusually large
backlogs of Boeing and Airbus after under-delivering to demand during the last order upturn, (2) an emerging market dominated
demand profile, and (3) the 787 product cycle and R&D tailwind. Our top picks are CL-Buy rated Boeing and Precision Castparts.
Aerospace stocks are highly correlated with both international air traffic growth and new aircraft orders. Both have recovered
faster than expected. Air traffic has now grown yoy at a double-digit rate for five of the past six months. New aircraft orders are
on pace to show one of the strongest annual totals on record in the first year of a recovery.
In an effort to dampen the cyclicality of its business, Boeing and Airbus intentionally under-delivered to demand by only
modestly raising production during the last order cycle (2004-2008) despite multiple consecutive years of record demand,
exiting a recession with >8 years of production backlog. With the OEMs still needing to deliver on last cycle’s backlog, plus the
surprise new order activity YTD, Boeing offers strong growth even if the macro environment deteriorates.
The 787 provides a unique product cycle that also offers growth regardless of the macroeconomic environment. Boeing has a
backlog of 847 Dreamliner orders, versus the targeted annual production run-rate of 120 aircraft. Furthermore, many Aerospace
companies will have a large R&D tailwind as the expense to develop Boeing’s 787 rolls off. See Exhibits 14-15.
Exhibit 14: The Aerospace cycle has turned Air traffic and new orders showing consistent improvement
Exhibit 15: Boeing still needs to deliver on last cycle’s order demand Backlog/sales still elevated even on the other side of the recession
Source: IATA, Company data, FactSet, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
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-20%
-10%
0%
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20%
30%
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50%
0
20
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0
200
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1970
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Record gap in demand vs.
supply leads to no downturn
Noah Poponak, CFA
September 20, 2010 Americas
Goldman Sachs Global Investment Research 14
Mobility continues to inflect higher in 4Q2010
One of the most significant trends in TMT is the rapid proliferation of wireless devices that allow always-on connectivity for an
increasingly mobile and productive global population. We see a key inflection point in 4Q2010 due to the rise of tablets as a new
category of wireless devices following the surprising success of Apple’s iPad, the move to fourth generation wireless technology
(4G) at Verizon, and continued competition driving smartphone prices lower and penetration higher.
We estimate that smartphones and tablets will be two of the fastest-growing consumer electronics categories over the next
three years and will rapidly cannibalize handsets and PCs, respectively. We estimate that smartphones will grow at a CAGR of
39% from 2010 through 2013 (see Exhibit 16), and that tablets will reach 16 mn units in 2010 and 35 mn in 2011. While
forecasting the success of individual vendors is challenging given the competitive and rapidly evolving landscape, we
recommend investing in the key enablers such as CL-Buy rated Qualcomm, which is the leader in cellular chipsets, and Buy-
rated Broadcom, which is the leader in Wi-Fi and Bluetooth chipsets and is also expanding into cellular chipsets.
We also favor the towers given their leverage to mobile data growth. We believe wireless carriers’ growth prospects are tied to
growth in data, facilitated by significant smartphone subsidies. Top picks in the space are CL-Buy rated SBA Communications
and Crown Castle as well as Buy-rated American Tower.
In IT Services, we believe Buy-rated Syniverse is among the best positioned companies to benefit from the secular growth in
mobile data, with nearly 80% of its revenue derived from wireless roaming and messaging. See Exhibit 17.
Exhibit 16: Smartphone penetration is inflecting as ASPs decline Smartphone unit, revenue and penetration estimates
Exhibit 17: New devices drive significantly higher data usage Estimated monthly data usage by device
Source: Company data, IDC, and Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
0%
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Smartphone iPad 3G data card 4G data card
Estimated monthly data usage (MB)
Simona Jankowski, CFA
September 20, 2010 Americas
Goldman Sachs Global Investment Research 15
Agricultural stocks should satisfy your hunger for returns today and long-term
Strain on the global supply and demand balance for grains has inspired a major run in agriculture commodities, with the spot prices
of wheat, corn and soybeans up 43%, 31% and 12%, respectively, over the past three months – all of which elements support robust
earnings growth for fertilizer and seed companies. In the global meat trade, shifting supply dynamics favor US pork and Brazilian
beef suppliers over US chicken producers.
We remain bullish on fertilizer stocks as exceptional price momentum across the nutrient complex, combined with benign input
costs, drives earnings upside. A favorable pricing backdrop for nitrogen and phosphate has emerged as banner returns
expected by farmers from the upcoming harvest have driven demand against a very tight supply backdrop. CL-Buy rated CF
Industries is our favorite way to trade this theme.
With farmer returns increasing and CL-Buy rated Monsanto trimming premiums for its cutting-edge RR2 soybean and
SmartStax corn technology, we believe solid yield results this fall will lead to market share gains and improved sentiment for
this ag biotech leader.
We favor hogs over chicken at this point in the meat cycle and have a Buy rating on Smithfield and a CL-Sell rating on Tyson.
Very tight supply dynamics support another leg up in hog prices in 2011, while a modest oversupply situation is likely to keep
chicken prices capped. Higher feed costs are a challenge for the group as vertically integrated producers struggle to
immediately pass input cost inflation through.
We see strong demand for Brazilian beef in the short term, making up for lower exports from Argentina and Uruguay as well as
other countries where tighter supply has hampered packers, including the United States and the EU. We therefore maintain our
preference for stocks with high exposure to Brazilian beef, namely Buy-rated Minerva. See Exhibits 18-19.
Exhibit 18: Futures prices suggest exceptional farmer returns Hypothetical forward farmer returns per bushel of corn based on futures
Exhibit 19: Fertilizer demand outlook – best since 2007 Total fertilizer demand expected to increase 6.3% (1.3mn tons) in 2011
Source: Iowa State University, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
-$0.50$0.00$0.50$1.00$1.50$2.00$2.50$3.00
Sep-02M
ar-03Sep-03M
ar-04Sep-04M
ar-05Sep-05M
ar-06Sep-06M
ar-07Sep-07M
ar-08Sep-08M
ar-09Sep-09M
ar-10Sep-10M
ar-11
Fertilizer Year Basis N P K Total
2007 13,194 4,572 5,133 22,899
2008 12,561 4,247 4,660 21,468
2009 12,027 3,647 3,265 18,939
2010E 12,812 4,185 3,963 20,960
2011E 13,189 4,419 4,666 22,274
2010/11 change
Percent 2.9% 5.6% 17.7% 6.3%
Volume 377 234 703 1,314
(000 Nutrient Tons)
Robert Koort, CFA
Lindsay Drucker Mann,
CFA
September 20, 2010 Americas
Goldman Sachs Global Investment Research 16
Cash balances continue to balloon – what now?
Whether in response to demand uncertainty, fear of a double dip or waiting for policy clarification, cash balances in
corporate America continue to balloon. We continue to believe that M&A will remain a prevalent theme and expect
companies to begin more aggressively addressing their capital allocation decisions into year-end. We refresh our M&A and
IRR work below and introduce a new analysis on which companies may be potential special dividend payers ahead of
expected tax code changes.
As seen in Exhibit 20, gross cash balances have grown by 40% between 2Q2008 and 2Q2010. Exhibit 21 shows that total cash as a
percentage of enterprise value likewise increased from 5.5% to 9.3% during this period as companies actively scaled back spending.
Based on our analysts’ cash flow projections and holding 2Q2010 EV constant, this number is estimated to rise to 11% by 2Q2011.
Exhibit 20: Total cash balances grew nearly 40% over the last two years… Coverage universe (ex-financials) total cash balances
Exhibit 21: … while Cash/EV grew from 5.5% to 9.3% and is expected to
grow to 11% one year from now Coverage universe (ex-financials) total cash as a % of enterprise value EV. 2Q2010
EV held constant for estimated periods
Source: FactSet, Goldman Sachs Research.
Source: FactSet, Goldman Sachs Research estimates.
M&A
Global M&A activity has recently shown signs of acceleration in August (up 6% mom), led by a 69% mom surge in the Americas
after a relatively lackluster 1H2010, and is now up 21% compared to 2009 levels. While the pace of M&A in the United States as
measured by announced M&A value to market cap at 5.3% in 2010 is below the 1999-2010 average of 6.8%, the pace of the backlog
buildup in 3Q2010TD, the highest in the past three years, should lead to higher 4Q2010 and early 2011 advisory results. Given the
high cash balances, modest valuations and compelling IRRs, we expect this acceleration in M&A to continue for the rest of the year.
0
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September 20, 2010 Americas
Goldman Sachs Global Investment Research 17
Refreshing the GSRHACQN basket: Our preferred way to monetize M&A acceleration
Since 2009, we have asked our analysts to identify potential candidates for M&A activity under our coverage. Those that screen
attractively, on a quantitative and/or qualitative basis, have had their price target methodologies changed to reflect an M&A
premium where appropriate. In Exhibit 22, we identify companies ranked by our analysts as 1 (>30% probability) or 2 (15-30%) for
potential M&A activity in the next 12 months.
Exhibit 22: Summary of M&A candidates: Companies our analysts believe have at least 15% chance of M&A activity where checked (√) names are included in GRHACQN basket. Not all companies are included in the basket due to technical and other limitations.
The Macerich Co. MAC 2 Neutral 43.03 38.00 -12% 12 months BRE Properties, Inc. BRE 2 Sell 42.45 33.00 -22% 12 months
GSRHACQN basket was introduced on October 10, 2009 and refreshed on November 19, 2009 and March 10, 2010.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 18
State of private equity
We expect the pace of sponsor-led activity to accelerate over the coming quarters, further contributing to global M&A volumes.
Notably, global LBOs in 3Q2010 have already surpassed last quarter’s levels, at about $40 billion in total volume, the highest since
mid-2008. As credit conditions remain very favorable, we expect the private equity industry will continue to deploy nearly $500
billion in dry powder raised over the last three years. Moreover, the need to monetize investments and return capital to limited
partners could lead to a flurry for strategic exits (selling a portfolio company to an industry player as opposed to exiting via an IPO),
which should further drive M&A volumes. Among our coverage, CL-Buy rated Blackstone and Buy-rated KKR are the largest
beneficiaries of this trend.
Companies with high IRRs
We provide a list of 86 companies that have IRRs of at least 15% from our quantitative department LBO model (see Exhibit 23).
Under the base case, the model assumes a five-year holding period, 20% bid premium, initial leverage based on sector-specific
debt/EBITDA multiples, a 9% weighted average cost of debt and an exit multiple based on a company’s three-year historical average
EV/EBITDA. Operational assumptions for sales growth, EBITDA margin and capex growth are taken from analyst forecasts.
Exhibit 23: Companies with IRRs of 15% or more Companies with IRRs over 15% from our standardized department LBO model
Source: Goldman Sachs Research estimates.
Ticker Company Rating SectorMarket Cap (USD, Mn) IRR Ticker Company Rating Sector
Market Cap (USD, Mn) IRR
WCG WellCare Health Plans, Inc. Buy Managed Care/Facilities 1,125 92% OSK Oshkosh Corp. Neutral Machinery 2,411 21%GT The Goodyear Tire & Rubber Co. Buy Automobiles 2,611 54% ATI Allegheny Technologies Neutral Steel 4,465 21%VRGY Verigy Ltd. Neutral Semiconductors 586 43% CMC Commercial Metals Company Sell Steel 1,651 20%ISIL Intersil Corp. Neutral Semiconductors 1,325 42% LSI LSI Corp. Neutral Semiconductors 2,931 20%LEAP Leap Wireless International, Inc. Neutral Telecom Tower 856 40% MGA Magna International, Inc. Sell Automobiles 8,636 20%VSEA Varian Semi Equipment Assoc. Neutral Semiconductors 2,065 40% ROCK Gibraltar Industries, Inc. Neutral Steel 261 20%AMAT Applied Materials, Inc. Buy Semiconductors 14,945 39% MCHP Microchip Technology Inc. Neutral Semiconductors 5,582 19%PCS MetroPCS Communications, Inc. Neutral Telecom Tower 3,390 37% HUN Huntsman Corp. CL-Buy Chemicals 2,491 19%AKS AK Steel Holding Buy Steel 1,553 36% USU USEC Inc. Neutral SmallMid Cap 559 19%EDMC Education Management Corp. Neutral SmallMid Cap 1,521 36% TIN Temple-Inland Inc. Buy Paper 2,091 19%FTR Frontier Communications Corp. Neutral Telecom Tower 2,446 35% ORA Ormat Technologies, Inc. Neutral Utilities 1,326 19%STLD Steel Dynamics Inc. Buy Steel 2,757 34% FWLT Foster Wheeler Ltd. Neutral E&C 3,083 18%KLAC KLA-Tencor Buy Semiconductors 5,323 33% EM Emdeon Inc. Neutral Managed Care/Facilities 1,248 18%IRF International Rectifier Corp. Neutral Semiconductors 1,420 33% EW Edwards Lifesciences Corp. Neutral Med Tech 3,464 17%ODP Office Depot Neutral Retail Hardlines 1,113 32% URS URS Corp. Neutral E&C 3,059 17%ARM ArvinMeritor, Inc. Buy Automobiles 1,363 31% BRCM Broadcom Corporation Buy Semiconductors 19,036 17%F Ford Motor Company CL-Buy Automobiles 42,433 30% TCK__B.TO Teck Resources Limited Neutral Metals 23,293 17%UPL Ultra Petroleum Neutral E&P 5,986 27% BTU Peabody Energy Corp. Buy Coal 12,670 17%RUE rue21, inc. Neutral Retail Specialty 559 27% RS Reliance Steel and Aluminum Co. Neutral Steel 2,981 17%SD SandRidge Energy, Inc. Neutral E&P 1,286 27% ADS Alliance Data Systems Corp. Neutral IT Services 3,581 17%PWR Quanta Services, Inc. Neutral E&C 3,708 27% PEG Public Service Enterprise Group Inc. CL-Buy Utilities 16,018 17%HOG Harley-Davidson, Inc. Sell Automobiles 6,633 27% V Visa Inc. CL-Buy IT Services 50,464 17%LRCX Lam Research Corp. CL-Buy Semiconductors 5,045 26% WYNN Wynn Resorts, Limited Neutral Leisure Lodging Gaming 11,004 17%WMB The Williams Companies, Inc. Buy MLPs 10,781 26% ADI Analog Devices, Inc. Buy Semiconductors 9,026 17%FDML Federal Mogul Corp. Neutral Automobiles 1,740 26% ACI Arch Coal Inc. Neutral Coal 4,038 16%NVDA Nvidia Corp. Neutral Semiconductors 6,153 26% LVS Las Vegas Sands Corp. Neutral Leisure Lodging Gaming 21,257 16%SMP Standard Motor Products, Inc. Neutral Automobiles 208 26% GLBC Global Crossing Ltd. Neutral Telecom Tower 1,009 16%AMD Advanced Micro Devices, Inc. Sell Semiconductors 4,360 25% CF CF Industries Holdings, Inc. CL-Buy Chemicals 7,087 16%CNX Consol Energy Inc. Buy Coal 6,391 25% URBN Urban Outfitters Inc. Neutral Retail Specialty 5,819 16%GME GameStop Corp. Neutral Retail Hardlines 3,196 25% MXIM Maxim Integrated Products Sell Semiconductors 5,160 16%SWN Southwestern Energy Co. Neutral E&P 11,037 24% CBI Chicago Bridge & Iron CL-Buy E&C 2,319 16%AA Alcoa Neutral Metals 12,576 24% WY Weyerhaeuser Co. Neutral Paper 8,489 16%EEQ Enbridge Energy Management Sell MLPs 895 23% SPR Spirit AeroSystems Holdings, Inc. Buy Aerospace & Defense 2,776 16%PMCS PMC-Sierra, Inc. Neutral Semiconductors 1,870 23% CVI CVR Energy, Inc. Neutral Integrated Oil/Refining 658 16%X U.S. Steel Group Buy Steel 6,665 23% MOH Molina Healthcare, Inc. Neutral Managed Care/Facilities 756 16%PCX Patriot Coal Corporation Sell Coal 981 23% TEN Tenneco Inc. Neutral Automobiles 1,587 15%NUVA NuVasive, Inc. Neutral Med Tech 1,518 22% AMSG AmSurg Corp. Neutral Managed Care/Facilities 527 15%EQIX Equinix, Inc. Neutral Telecom Tower 4,142 22% GPI Group 1 Automotive, Inc. Buy Automobiles 690 15%SHAW The Shaw Group Inc. Neutral E&C 2,780 22% SAH Sonic Automotive, Inc. Neutral Automobiles 484 15%ANF Abercrombie & Fitch Buy Retail Specialty 3,141 22% IPI Intrepid Potash, Inc. Sell Chemicals 1,939 15%BZ Boise Inc. Neutral Paper 606 22% SU Suncor Energy Inc. Buy Integrated Oil/Refining 50,729 15%UFS Domtar Corp. Buy Paper 2,751 21% BBG Bill Barrett Corp. Neutral Coal 1,505 15%JCG J. Crew Group, Inc. Neutral Retail Specialty 2,131 21% CHS Chico's FAS, Inc. CL-Sell Retail Specialty 1,763 15%
September 20, 2010 Americas
Goldman Sachs Global Investment Research 19
Buybacks
We believe that alongside M&A and dividends, companies could put the piled up cash to use by repurchasing shares in order to
drive shareholder value. We had first highlighted a set of quantitative buy-back related screens in our report “SPOTLIGHT SERIES:
Buybacks” published on December 9, 2009.
Below, we refresh our core screen of a list of stocks that have the highest remaining repurchase authorizations as a percentage of
market cap (see Exhibit 24). For these stocks the completion of existing buyback programs has the potential to be more than a
needle mover and drive upside and EPS accretion.
Exhibit 24: Largest remaining authorizations as a percentage of market cap
Buy and Neutral-rated stocks
Source: Company filings, Goldman Sachs Research estimates.
We acknowledge that some companies with a high ratio of repurchase authorizations to market cap may not be buying back very
actively at present, and their immediate capital allocation or investment priorities may lie elsewhere. However, we view these
authorizations potentially indicative of future repurchases, and completion or resumption of buybacks may drive significant upside
to the stock price.
Last Market cap Repurchase Active Repurchase Remaining /Ticker Company name Sector Rating price ($ mn) authorized ($ mn) remaining ($ mn) market capNVLS Novellus Systems Inc. Semiconductors Neutral $24.95 2,379 1,000 681 29%CBB Cincinnati Bell Inc. Telecom Tower Neutral $2.70 543 150 150 28%MCO Moody's Corporation Finance Specialty Neutral $24.85 5,927 2,000 1,331 22%HD The Home Depot, Inc. Retail Hardlines Buy $29.95 50,496 40,000 11,299 22%MTH Meritage Homes Corp. Homebuilders Buy $18.38 590 200 130 22%AON Aon Corp. Insurance Neutral $37.89 10,211 6,600 2,165 21%JNY Jones Apparel Group Retail Broadlines Neutral $18.64 1,555 500 304 20%NVDA Nvidia Corp. Semiconductors Neutral $10.57 6,153 2,700 1,200 20%
September 20, 2010 Americas
Goldman Sachs Global Investment Research 20
Potential special dividend opportunities
According to the Goldman Sachs office in Washington, DC, we expect a heavy focus for the remainder of the year on tax policy and
whether to extend all or some of the Bush cuts from 2001 and 2003 that are due to expire at year-end. Without exploring the range
of possible outcomes (moving from the current 15% tax rate on dividends to anywhere between 20% and 39.6%), we note the
potential for companies to specially reward shareholders with one-time payments given large cash balances and favorable tax
situations (see Exhibit 25). This would, in turn, provide a higher total return to investors. Recently, we have witnessed such moves
by Wynn, Sapient, Warner Chilcott, and Universal American, among others. Below we provide a screen for potential special
dividend payers, for which our analysts also see an opportunity, identified based on a set of criteria as follows:
Buy or Neutral-rated companies that pay a dividend.
Net debt/equity for the latest reported quarter is less than 35%.
Quick ratio for the latest reported quarter is over 1.5.
FCF yield for 2010E forecast over 5%
Insider ownership is greater than 10% of the total shares outstanding.
Exhibit 25: Potential Special Dividend Payers?
Companies that pay a dividend that are cash-rich, have low leverage and high insider ownership.
Source: Lionshares via FactSet, Goldman Sachs Research estimates.
While all of these companies quantitatively screen as good candidates with a potential to pay a special dividend, we acknowledge
some of them may have other strategically desirable uses of cash.
Ticker Company Sector Rating Market Cap Last Div YldNet debt/
Equity Quick Ratio FCF YieldInsider
Ownership($,mn) Price 2010E Last Q Last Q 2010E (%)
MSFT Microsoft Corp. Software Buy 220,650 25.33 2% -80% 2.1 10% 12%AEO American Eagle Outfitters Inc. Retail Specialty Neutral 3,017 14.66 2% -31% 1.9 8% 11%SNI Scripps Networks Interactive, Inc. Media and Entertainment Neutral 7,611 45.36 1% 31% 4.8 6% 31%SYK Stryker Corp. Medical Technology Neutral 19,515 48.74 1% -45% 4.6 11% 13%GWW W.W. Grainger Inc. Multi-industry Neutral 8,285 116.75 2% 5% 1.7 6% 15%
September 20, 2010 Americas
Goldman Sachs Global Investment Research 21
Government Corner: Watching budget proposals and mid-term elections
Despite the White House’s recently announced stimulus initiatives, we believe the difficult budget situations at all three
levels of government present downside risk to companies with exposure to government spending. With Congressional mid-
term elections approaching, we continue to monitor the evolving budget and tax outlook.
Our expectation of constrained government spending is based on difficult budget situations, as highlighted by the Goldman Sachs
US Economics team and Washington, DC-based economist Alec Phillips. While these projections rely on naturally imprecise
assumptions of economic growth and legislative actions, our economists expect the US federal budget deficit to become
approximately 6% of US GDP by 2020 (see Exhibit 26).
States and local governments also face serious budget issues. As Exhibit 27 shows, state governments face impending budget
shortfalls. States were given $150 billion in aid as part of the stimulus package passed by Congress in 2009 and an additional $26
billion was signed into law last month. We do not see additional aid on the horizon and, as such, states will likely need to make up
the shortfall with spending cuts or tax increases. Further, reduced spending at the local government level is a particular downside
risk. Local revenues may fall even further from current levels, as they are largely based on property taxes, a revenue source that lags
economic activity to a greater degree than income taxes.
Exhibit 26: Projections of the federal deficit as a percentage of GDP Different assumptions of economic growth and tax cut renewals materially impact the
relative size of the federal budget deficit.
Exhibit 27: Budget shortfalls at the state level will need to be filled We do not expect states to receive substantial federal aid to close budget gaps.
Source: CBO, OMB, Department of the Treasury, Department of Commerce, Goldman Sachs Research.
The GSRHGOVT and GSRHGXHD Bloomberg baskets capture companies under our coverage most exposed to government spending.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 22
Newly announced proposals from the President are modest in size when compared to the 2009 stimulus package and
should not detract investor attention from the long-term budget issues.
The Bonus Depreciation plan allows for the full expensing of capital investments in the first year. Our economists believe that, if
passed, this will not likely have a substantial impact on corporate behavior, as it does not introduce new tax benefits, but simply
moves them forward from future years. Through 2020, the cost to the federal government is $30 billion.
Additional infrastructure spending, at a cost of $50 billion, perhaps has the most difficult road to passage due to funding issues.
The Research and Experimentation tax credit, which our economists believe is an effective incentive, may be too modestly sized
to have a material impact.
We have identified the companies under our coverage that are most exposed to government spending to aid investors who believe
that there is a downside risk to government spending. GSRHGOVT includes companies where at least 20% of revenues are derived
from government and GSRHGXHD, is similar, but excludes Healthcare and Aerospace/Defense companies (see Exhibit 28).
Exhibit 28: Composition of the GSRHGOVT basket
Companies under our coverage where sales to government were at least 20% of revenues in the last reported year
Source: Goldman Sachs Research, Company data.
Ticker Company GICS Level ThreeMarket Cap
($, mn)Gov't as a% of Sales GSRHGOVT GSRHGXHD Ticker Company GICS Level Three
Market Cap($, mn)
Gov't as a% of Sales GSRHGOVT GSRHGXHD
CNC Centene Corp. Health Care Providers & Services 1,070 100% CVH Coventry Health Care, Inc. Health Care Providers & Services 3,139 57% AGP AMERIGROUP Corp. Health Care Providers & Services 2,017 100% OCR Omnicare, Inc. Health Care Providers & Services 2,548 53% MOH Molina Healthcare, Inc. Health Care Providers & Services 756 100% MGLN Magellan Health Services, Inc. Health Care Providers & Services 1,595 50% LMT Lockheed Martin Corp. Aerospace & Defense 25,465 98% BA The Boeing Company Aerospace & Defense 46,491 49% GVA Granite Construction Inc. Construction & Engineering 885 96% OSK Oshkosh Corp. Machinery 2,411 49% WCG WellCare Health Plans, Inc. Health Care Providers & Services 1,125 93% KBR KBR, Inc. Construction & Engineering 3,822 49% NOC Northrop Grumman Corp. Aerospace & Defense 17,551 91% NUVA NuVasive, Inc. Health Care Equipment & Supplies 1,518 48% LLL L-3 Communications Holdings Inc. Aerospace & Defense 8,039 91% THC Tenet Healthcare Corp. Health Care Providers & Services 2,186 48% HS HealthSpring Inc. Health Care Providers & Services 1,271 90% CMP Compass Minerals International Metals & Mining 2,396 47% RTN Raytheon Company Aerospace & Defense 17,515 88% HMA Health Management Associates Health Care Providers & Services 1,894 41% ATK Alliant Techsystems, Inc Aerospace & Defense 2,417 84% LPNT LifePoint Hospitals, Inc. Health Care Providers & Services 1,899 40% GD General Dynamics Corp. Aerospace & Defense 23,819 80% CSC Computer Sciences Corp. IT Services 6,757 39% HUM Humana Inc. Health Care Providers & Services 8,678 76% CYH Community Health Systems, Inc. Health Care Providers & Services 2,913 37% EW Edwards Lifesciences Corp. Health Care Equipment & Supplies 3,464 76% TXT Textron Inc. Industrial Conglomerates 5,818 31% SYK Stryker Corp. Health Care Equipment & Supplies 19,515 72% AAWW Atlas Air Worlwide Holdings, Inc. Air Freight & Logistics 1,243 31% ITT ITT Corp. Aerospace & Defense 8,455 70% BMY Bristol-Myers Squibb Company Pharmaceuticals 46,215 30% HSP Hospira, Inc. Health Care Equipment & Supplies 9,248 70% GR Goodrich Corp. Aerospace & Defense 8,909 30% BDX Becton Dickinson & Co. Health Care Equipment & Supplies 17,874 69% UNH UnitedHealth Group Health Care Providers & Services 38,379 30% BAX Baxter International, Inc. Health Care Equipment & Supplies 27,528 69% JEC Jacobs Engineering Group Inc. Construction & Engineering 4,480 30% FLIR FLIR Systems, Inc. Electronic Equipment & Instruments 4,397 68% MLM Martin Marietta Materials Construction Materials 3,513 28% ZMH Zimmer Holdings, Inc. Health Care Equipment & Supplies 10,266 67% VMC Vulcan Materials Company Construction Materials 4,763 28% STJ St. Jude Medical, Inc. Health Care Equipment & Supplies 12,896 67% EMS Emergency Medical Services Corp. Health Care Providers & Services 2,308 28% BSX Boston Scientific Corp. Health Care Equipment & Supplies 8,284 66% MWA Mueller Water Products, Inc. Machinery 419 28% COV Covidien PLC Health Care Equipment & Supplies 19,953 64% HXL Hexcel Corp. Aerospace & Defense 1,841 27% URS URS Corp. Construction & Engineering 3,059 63% SHAW The Shaw Group Inc. Construction & Engineering 2,780 25% MDT Medtronic, Inc. Health Care Equipment & Supplies 37,462 60% ROP Roper Industries, Inc. Electrical Equipment 6,143 20% COL Rockwell Collins Corp. Aerospace & Defense 9,237 58% RVBD Riverbed Technology, Inc. Communications Equipment 3,364 20%
September 20, 2010 Americas
Goldman Sachs Global Investment Research 23
Demographic opportunities
We see three major population shifts that we believe will have material implications for long-term investors, and we
highlight our tradable basket of stocks exposed to these themes (Bloomberg ticker: GSRHDEMO) as a vehicle for exposure.
Retiring Baby Boomers. The approaching retirement of the Baby Boomers (born 1946-1964) will significantly alter the
spending, saving and leisure patterns of the largest generational cohort in US history. We see opportunities among healthcare
stocks that can successfully navigate industry changes such as CL-Buy rated Allergan and McKesson and financial services
companies that can help Boomers meet their retirement needs including Neutral-rated Ameriprise. Conversely, we see
challenges for discretionary companies that target consumers age 55-64, such as CL-Sell rated Chico’s.
The expanding global middle class. Our economics team coined the notion of the “expanding middle” to describe both a
global shift toward middle-income economies and the growth of the middle-class population within these economies. We see
continued growth in consumer and infrastructure demand driven by the expanding middle, and see consequences across
sectors. Exposed names include Buy-rated Citigroup, Teck Resources, Colgate-Palmolive and News Corp.
Generational waves after the Baby Boom. Less well understood than the Baby Boom are population peaks in the under-30
demographic in the United States. The rise of these groups to economic prominence will have significant consequences,
particularly within the Consumer and TMT sectors. Top picks include CL-Buy rated Hasbro and Buy-rated Broadcom and
Disney. See Exhibits 29-30.
Exhibit 29: Age distribution in the US is undergoing material changes US population by age (thousands), June 2010 estimate
Exhibit 30: Emerging economies are set to grow faster than developed peers Social and economic measures, grouped by current wealth bands
Source: US Census Bureau, Population Division.
Source: World Bank, UN Population Division, CIA World Factbook, GS SUSTAIN.
investors” by Anthony Carpet, et al. for a more detailed
discussion of demographic themes
and beneficiaries.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 24
Current Americas sector views: Commodities
We continue to expect oil demand to grow in excess of non-OPEC supply and view a “slow grind higher” as the most likely
path for oil prices into 2011. An uncertain economic environment has emerged as the key downside risk for energy markets,
but our medium-term analysis continues to show a likely return to demand rationing pricing within the next few years.
Against this backdrop of heightened near-term economic uncertainty, we remain selective across the broad energy sector.
Within Integrated Oil we favor visible production and resource growth, with an emphasis on companies exposed to Canada’s oil
sands, Brazil, onshore North American unconventional resources, or international growth. Top picks include CL-Buy rated
Canadian Natural Resources and Occidental Petroleum and Buy-rated OGX.
For E&P stocks to outperform we believe that investors need to have greater confidence in weather-normal natural gas supply-
demand via either lower rig counts or improved demand. Within the group we see CL-Buy rated EOG Resources and Newfield
Exploration Corporation as secular winners with above average growth and returns.
We have an Attractive coverage view on the Coal sector, as we believe stocks will pre-trade a 1H2011 global steel recovery. Top
picks are Buy-rated Alpha Natural Resources, Peabody Energy and Consol Energy, each of which has leverage to rising met
coal demand and company-specific catalysts.
In June 2010 we initiated coverage on the Clean Energy sector. Among solar stocks, we see higher-than-expected demand
driving profit share to lower cost producers and view Buy-rated First Solar as a structural winner where cost advantages are
increasing. In the advanced battery sub-sector we think multiples are in line with realistic growth expectations given the likely
multi-year waiting period prior to clarity on mainstream plug-in adoption.
Exhibit 31: Leading indicators highlight the macro risk for energy demand Goldman Sachs Global Leading Indicator (left); implied global oil demand (right)
Exhibit 32: We forecast 91% global solar growth in 2010 and 30% in 2011 New solar photovoltaic installations by region; in MWs
Source: Goldman Sachs Global ECS Research, IEA, Goldman Sachs Research.
Our Conviction List has been actively managed by our Investment Review Committee (IRC) since inception in September
2006.
All ratings changes and material price target changes must be reviewed and approved by the IRC.
The list contains our analysts’ highest conviction stock ideas. See Exhibit 47.
Exhibit 47: Goldman Sachs Conviction List
as of September 17, 2010
Source: Goldman Sachs Research estimates.
Stock/Business Unit Ticker RatingMkt Cap
$mmLast Price
Target Price
% to Target
TP Period CL Days Analyst Stock/Business Unit Ticker Rating
Mkt Cap $mm
Last Price
Target Price
% to Target
TP Period CL Days Analyst
Tech HealthcareLam Research Corp. LRCX Buy 5,045 $39.48 53.00 34% 6 m 815 James Covello CIGNA Corp. CI Buy 9,413 $34.64 44.00 27% 6 m 596 Matthew Borsch, CFATeradyne, Inc. TER Buy 2,045 $10.39 17.00 64% 6 m 498 James Covello Baxter International, Inc. BAX Buy 27,528 $44.98 57.00 27% 12 m 56 David H. RomanAmazon.com Inc. AMZN Buy 67,399 $148.13 150.00 1% 6 m 102 James Mitchell, CFA McKesson Corp. MCK Buy 16,978 $62.42 81.00 30% 12 m 128 Robert P. JonesOracle Corp. ORCL Buy 128,771 $25.36 32.00 26% 12 m 10 Sarah Friar Parexel International Corp. PRXL Buy 1,271 $22.09 28.00 27% 6 m 44 Robert P. JonesSBA Communications Corp. SBAC Buy 4,379 $37.86 43.00 14% 12 m 500 Jason Armstrong, CFA Medco Health Solutions MHS Buy 22,673 $47.04 76.00 62% 12 m 81 Randall Stanicky, CFACrown Castle International Corp. CCI Buy 11,912 $41.64 46.00 10% 12 m 245 Jason Armstrong, CFA Allergan, Inc. AGN Buy 19,699 $64.67 81.00 25% 12 m 151 Randall Stanicky, CFAJuniper Networks, Inc. JNPR Buy 16,028 $29.74 32.00 8% 12 m 287 Simona Jankowski, CFA IndustrialsRogers Communications Inc. RCI__B.TO Sell 21,883 C$38.66 29.00 -25% 12 m 227 Jason Armstrong, CFA Dover Corp. DOV Buy 9,285 $49.84 60.00 20% 12 m 38 Terry DarlingQUALCOMM, Inc. QCOM Buy 68,915 $41.97 46.00 10% 12 m 67 Simona Jankowski, CFA Cummins, Inc. CMI Buy 16,589 $84.08 104.00 24% 12 m 4 Jerry Revich, CFASapient SAPE Buy 1,547 $11.22 13.00 16% 12 m 136 Julio C. Quinteros Jr. Tyson Foods, Inc. TSN Sell 6,400 $17.02 14.00 -18% 6 m 39 Lindsay Drucker Mann, CFAVisa Inc. V Buy 50,464 $68.38 93.00 36% 12 m 70 Julio C. Quinteros Jr. The Boeing Company BA Buy 46,491 $62.58 84.00 34% 12 m 130 Noah Poponak, CFA
Consumer Precision Castparts Corp. PCP Buy 17,839 $124.40 140.00 13% 12 m 71 Noah Poponak, CFAFord Motor Company F Buy 42,433 $12.44 16.00 29% 6 m 513 Patrick Archambault, CFA Lockheed Martin Corp. LMT Sell 25,465 $68.51 65.00 -5% 12 m 254 Noah Poponak, CFADana Holding Corp. DAN Buy 1,540 $11.00 15.00 36% 6 m 198 Patrick Archambault, CFA Northrop Grumman Corp. NOC Sell 17,551 $57.77 51.00 -12% 12 m 67 Noah Poponak, CFAHasbro, Inc. HAS Buy 6,721 $44.43 57.00 28% 12 m 136 Michael Kelter United Parcel Service, Inc. UPS Buy 66,053 $66.72 78.00 17% 12 m 198 Scott Malat, CFAMead Johnson Nutrition Co. MJN Buy 11,505 $56.15 61.00 9% 12 m 46 Andrew Sawyer, CFA Canadian Pacific Railway Ltd. CP.TO Buy 10,469 C$63.7 75.00 18% 12 m 81 Scott Malat, CFAStaples, Inc. SPLS Buy 14,151 $19.39 23.00 19% 12 m 9 Matthew J. Fassler Huntsman Corp. HUN Buy 2,491 $10.61 13.00 23% 12 m 133 Robert Koort, CFAStarwood Hotels & Resorts HOT Buy 9,526 $50.94 62.00 22% 12 m 403 Steven Kent, CFA CF Industries Holdings, Inc. CF Buy 7,087 $99.74 110.00 10% 12 m 31 Robert Koort, CFANike, Inc. NKE Buy 37,508 $76.64 85.00 11% 6 m 204 Michelle Tan, CFA Monsanto Co. MON Buy 31,477 $57.27 71.00 24% 12 m 107 Robert Koort, CFAChico's FAS, Inc. CHS Sell 1,763 $9.99 8.00 -20% 6 m 53 Michelle Tan, CFA CommoditiesLorillard, Inc LO Buy 13,579 $80.69 97.00 20% 12 m 67 Judy E. Hong Canadian Natural Resources Ltd. CNQ Buy 36,270 $33.41 41.00 23% 6 m 226 Arjun N. MurtiPepsiCo, Inc. PEP Buy 111,439 $66.61 76.00 14% 12 m 128 Judy E. Hong Occidental Petroleum Corp. OXY Buy 62,096 $76.45 90.00 18% 6 m 238 Arjun N. Murti
Financials Newfield Exploration Company NFX Buy 7,082 $53.31 64.00 20% 6 m 108 Brian Singer, CFAJ.P. Morgan Chase & Co. JPM Buy 162,952 $40.99 51.00 24% 12 m 599 Richard Ramsden EOG Resources Inc. EOG Buy 22,978 $91.00 129.00 42% 6 m 38 Brian Singer, CFANorthern Trust Corp. NTRS Buy 11,903 $49.25 57.00 16% 12 m 116 Richard Ramsden Spectra Energy Corp. SE Buy 14,131 $21.74 26.00 20% 12 m 344 Theodore DurbinBrookdale Senior Living Inc. BKD Buy 1,690 $14.16 20.00 41% 12 m 36 Sloan Bohlen Sunoco Logistics Partners L.P. SXL Buy 2,359 $75.57 87.00 15% 12 m 102 Michael Cerasoli, CFASimon Property Group SPG Buy 33,259 $94.59 100.00 6% 12 m 36 Jonathan Habermann Ameren Corp. AEE Sell 6,570 $27.56 22.00 -20% 12 m 226 Michael LapidesBlackRock, Inc. BLK Buy 31,695 $162.54 173.00 6% 12 m 116 Marc Irizarry Public Service Enterprise Group Inc. PEG Buy 16,018 $31.59 39.00 23% 12 m 88 Michael LapidesThe Blackstone Group L.P. BX Buy 12,180 $10.77 14.50 35% 12 m 36 Marc Irizarry Chicago Bridge & Iron CBI Buy 2,319 $23.44 28.00 19% 12 m 324 Joe RitchieACE Limited ACE Buy 19,448 $57.79 61.00 6% 12 m 116 Christopher M. NeczyporJefferies Group Inc. JEF Sell 4,982 $24.78 22.00 -11% 6 m 116 Daniel Harris, CFAThe Nasdaq Stock Market, Inc. NDAQ Buy 4,046 $19.36 23.00 19% 12 m 226 Daniel Harris, CFA
September 20, 2010 Americas
Goldman Sachs Global Investment Research 33
Appendix: Investment Profile Methodology
Calculation methodology for the GS Investment Profile (IP) scores
Returns and multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters away. Growth uses
the value for the fiscal year at least seven quarters away compared with the year at least three quarters away (on a per-share
basis for all metrics). For instance, if today is May 25, 2010 and the next year-end is December 31, 2010, we use December 2011
for valuation and returns, and 2012/2011 for growth.
Goldman Sachs metrics are normalized by assigning a Z-score based on the company’s position within the overall distribution
of all IP scores (assuming a normal distribution).
The average of these normalized metrics is taken (or the average of those available in the case of financials).
The peer group average is based on the simple average of normalized metrics for all the constituents.
This average is then used to generate a percentile score from 1 to 100.
Measures used in each factor
Returns: calculated using an average of return on equity, return on capital employed, and cash return on cash invested
(CROCI—a measure of cash returns) for each stock. Only ROE is considered for select financial stocks (Banks, Insurance and
Market structure). Top Quintile (Q1): stocks with the highest returns; Bottom Quintile (Q5): stocks with the lowest returns.
Growth: calculated using an average of a company’s sales, EBITDA, and EPS growth. For select financials (Banks, Insurance,
Market structure), we use only EPS and sales growth. Q1: stocks with the highest growth; Q5: stocks with the lowest growth.
Multiple: calculated using an average of price/earnings, price/book, dividend yield, enterprise value/EBITDA, enterprise
value/free cash flow and enterprise value /debt adjusted cash flow. Only price/earnings, price/book and dividend yield are used
for select financial stocks (Banks, Insurance and Market structure). Q1: stocks with the lowest multiples; Q5: stocks with the
highest multiples.
Volatility: calculated as the standard deviation of daily total returns over a trailing 12-month period. Q1: stocks with the lowest
volatility; Q5: stocks with the highest volatility.
Balance sheet: calculated using net debt/EBITDA (leverage). This is used only for non-financial stocks. Q1: stocks with the
lowest leverage; Q5: stocks with the highest leverage.
Integrated: calculated as an aggregate score based on Returns, Growth and Valuation. Q1: stocks with the highest integrated
score; Q5: stocks with the lowest integrated score.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 34
Equity Baskets Disclosure
The Equities Division of the firm has previously introduced the basket of securities discussed in this report. The Equity Analyst
may have been consulted as to the composition of the basket prior to its launch; however, the views expressed in this research
and its timing were not shared with the Equities Division.
Rating and pricing information not provided elsewhere (as of September 17, 2010)
ALL America Latina Logistica (B/A; R$16.70), AmerisourceBergen Corp. (B/A; $30.18), Ameriprise Financial, Inc. (N/N; $47.62),
American Tower Corp. (B/A; $49.27), ArvinMeritor, Inc. (B/A; $14.04), Baidu.com, Inc. (B/A; $85.73), Banco ABC (B/A; R$14.28),
(B/N; $334.95), Smithfield Foods, Inc. (B/N; $16.64), SulAmérica S.A. (B/A; R$18.49), Suzano Papel E Celulose SA (B/A; R$16.52),
Syniverse Technologies, Inc. (B/A; $21.60), Vale (B/N; $27.85).
September 20, 2010 Americas
Goldman Sachs Global Investment Research 35
Reg AC
We, Anthony Carpet, Laura Conigliaro, Robert D. Boroujerdi, Michael Chanin, CFA, Deep Mehta and Thomas Craven, CFA, hereby certify that all of the views expressed in this report accurately reflect
our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,
returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage
universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,
ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month
volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make
comparisons between companies in different sectors and markets.
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant
published research.
Company-specific regulatory disclosures
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant
published research.
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 31% 53% 16% 47% 44% 34%
As of July 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,814 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment
Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage
groups and views and related definitions' below.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 36
Price target and rating history chart(s)
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published research.
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or
other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or
specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
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Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if
with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.
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Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a
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potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for
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group's historical fundamentals and/or valuation.
September 20, 2010 Americas
Goldman Sachs Global Investment Research 37
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic
transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because
there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and
price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not
meaningful and is therefore excluded.
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