Microsoft word - sp morning briefing second edition 07-07-08.doc

Strategies and Investment Ideas from S&P Equity Research
July 7, 2008
MARKET FOCUS
Ahead of Earnings Reports, S&P Analysts Adjust Outlooks
• Before the markets opened today, S&P Equity Analysts tweaked their models on a couple of tech and financial concerns in advance of the companies’ earnings announcements later this month. Information Technology (Overweight)
STAT OF THE DAY
S&P Select Technology Sector SPDR (XLK), Rydex S&P Equal Weight
Technology ETF (RYT), iShares S&P Global Technology Sector Index Fund (IXN),
iShares S&P GSTI Technology Index Fund (IGM)
• S&P equity analyst Angelo Zino, CFA, said he would still not be adding to positions of semiconductor packaging and test services company Amkor Technology (AMKR $10.11 ***; Mid-Cap Blend) today, after he cut his Q2 2008 Dividend Record decreased their dividend during the Q2 • He reiterated his hold ranking on the shares and kept his 12-month target price in a note to investors this morning, noting, among other things, that he is encouraged by Amkor's recent ability to sustain a gross margin in the mid-20% area, which he attributes to the company passing on higher commodity costs to customers. Amkor stock was higher by 1.7% at 10:45 a.m. • A provider of advanced software-based test systems for telecoms, Catapult Communications (CATT $7.02 *; Small-Cap Blend) warned that June-quarter results, which are likely to be reported towards the end of the month, will be below expectations. The company now expects revenue of $8.5 million, compared to its prior guidance of $9.9 million, but it remains hopeful about the development of long-term evolution wireless standard. • As a result, Jim Yin, S&P equity analyst, reiterated his strong sell opinion on the shares this morning, while widening his loss estimate for Catapult’s fiscal 2008 by 21.7% and cutting his 12-month target price by 8.3%. CLARIFICATION:
• “We believe business will deteriorate in the near term due to slow adoption of new technology, reflecting the long process in finalizing the standard and further weakness in the global economy,” Yin wrote in his report to investors this morning. Shares were lower by 8.6% at 10:45 a.m. Repsol (REP SM EUR 24, ***) (REP $38 ***; Financials (Marketweight)
S&P Select Financials Sector SPDR (XLF), Rydex S&P Equal Weight Financial
ETF (RYF), iShares S&P Global Financials Sector Index Fund (IXG)
• S&P equity analyst Roy Shepard would be a seller of Brandywine Realty (BDN $15.09 **; Mid-Cap Value), an office REIT that is scheduled to release All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and al of the subject securities or issuers. No part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Please see analyst certification and required disclosures on the last two pages of this report. Additional information is available upon request. Copyright 2008 by Please see Required Disclosures on the last two pages of this report.
earnings July 30. He cut his 2008 per-share funds from operations estimate by 4% on his view of softening demand for suburban office space. • “We are concerned about potential lease up of new development projects in a difficult economy,” Shepard wrote in a note to investors this morning in which he also noted the dilution from the recent sale of non-core California properties. • He also cut his 12-month target price by 13.3%, based on his updated dividend discount model assuming a 10.2% discount rate and 1% terminal growth. This implies a multiple of 5.4 times his 2008 FFO outlook, which is a significant discount to better-positioned office peers, according to Shepard. Brandywine shares were off by 1% at 10:58 a.m. • Forecasts were also adjusted today for bank holding company Marshall & Ilsley (MI $14.14 **; Large-Cap Blend), which is due to report earnings July 16, for which S&P reduced its opinion to a sell from a hold. S&P equity analyst Erik Oja took down his fiscal 2008 earnings forecast to a loss and slashed his 12-month target price by 40%. (For details, see ‘S&P Equity Research,’ below.) • Shares of the company were lower by 6.3% at 10:57 a.m.
S&P EQUITY RESEARCH (AS OF 10:30 A.M. ET)
Office REIT Downgraded to Sell
Financials (Marketweight)
• S&P REDUCES OPINION ON SHARES OF MARSHALL & ILSLEY TO SELL FROM HOLD: Ahead of its Q2 results scheduled for next week, MI announces a Q2 loan loss provision of $900M and net chargeoffs of $415M. We modeled for loan loss provisions of $150M. However, MI expects to maintain its dividend level for '08. On the EPS shortfall, and our expectation that the credit quality of MI's real estate construction lending portfolio may decline further, we are reducing our full year '08 EPS forecast to a loss of $0.31, from EPS of $1.67. We are also reducing our target price by $8 to $12, based on a below-peers multiple of 5.8X our unchanged '09 EPS estimate of $2.08: E. Oja
S&P PORTFOLIO STRATEGY AND UPDATES (AS OF 10:30 A.M. ET)
No Portfolio Changes

S&P INDUSTRY ‘TRENDSCOPE’
Health Matters: Evolving Patent Law
MORNING BRIEFING

Originally published 06/27/2008 11:08 a.m. (Update: this version corrects source’s name) Positive potential implications: Barr Pharmaceuticals (BRL $43 ***; Large-Cap,
Growth), Dr. Reddy's Laboratories (RDY $17 ****; Mid-Cap, Foreign), Mylan (MYL $12
***; Large-Cap, Growth), Teva Pharmaceutical (TEVA $44 *****; Large-Cap, Foreign),
Lupin Pharmaceuticals (500257 Bombay NR), Sun Pharmaceutical (SUN Bombay NR),
and Takeda Pharmaceutical (4502 Tokyo NR)
Negative potential implications: Stocks: King Pharmaceuticals (KG $10 ***; Large-Cap,
Blend), Pfizer (PFE$18 ***; Large-Cap, Blend), Sanofi-Aventis (SNY $34 ****; Large-Cap,
Foreign), and Synta Pharmaceuticals (SNTA $6 NR); ETF: Claymore/Ocean Tomo
Patent (OTP).
• Patent laws are always evolving, but the pace has stepped up in 2007 and 2008, with recent court decisions and pending legislation that could have important mid- to long-term implications for pharmaceutical companies and generics companies. • At the core of these changes is a U.S. Supreme Court (USSC) decision, known in patent law circles as "KSR." Decided in April 2007, the case (KSR International Co. v. Teleflex Inc.) involved an adjustable gas pedal for cars, but it put health care patent lawyers on the alert. • In KSR, the USSC essentially made getting a patent or winning litigation against an existing patent harder, according to patent lawyers. An important test for a product's patentability is its "obviousness," a legal concept that concerns whether someone with ordinary knowledge of a field would have been able to come up with the same idea with then-available information and not using hindsight. KSR said a key criterion federal courts have used for 25 years to determine obviousness is too rigid. It said that something is obvious -- and therefore not patentable -- if a skilled person can create the invention using available options within his grasp. The upshot, many patent lawyers say, is higher hurdles for patent applicants. • The decision's impact will take time to wind its way through the courts, and is likely to be of particular importance for so-called "Paragraph IV" patent challenges, in which generics companies try to invalidate brand-name companies' patents, says Colin Sandercock, a patent attorney at the law firm Proskauer Rose LLP. Patent attorneys are divided about KSR's implications, but the general trend is clear: Although branded pharmaceutical companies still enjoy significant patent protections, KSR and subsequent cases could tilt the balance in favor of patent challengers away from innovators by overturning pro-patent lower-court decisions that were made prior to KSR. • Billions of dollars can be at stake in patent challenges. By law, generics companies that are first to file for and receive Food and Drug Administration (FDA) tentative approvals for their drug and that fight to invalidate patents get six months exclusivity to market their generic before competitors can come on the market. A generics company with a few exclusivities under its belt for big products can build up resources to become a major industry player. Barr Pharmaceuticals, Teva, and Mylan, among the biggest generics companies, have built world-class businesses, largely with the help of funds raised through winning exclusivity rights. Aggressive Indian pharmaceutical companies now are using similar tactics to become big shots in the United States. • Attorneys say that patents on truly innovative drugs -- those covering new chemical entities -- aren't in danger. They point to a recent case involving one of Takeda's patents on its best-selling diabetes drug Actos. In that case, the federal appeals court upheld a lower court decision favoring Takeda over its generics competitor, Alphapharm (now part of Mylan), noting that the compound differed sufficiently in its side effect profile from a similar, existing compound to be considered novel and therefore patentable. "Takeda affirms the belief, by many, that, on the whole, it likely will be more difficult to invalidate a MORNING BRIEFING

patent on a new active ingredient than on a new formulation of a known active ingredient," says Sandercock. Likewise, KSR is less likely to result in invalid biotechnology patents because the technologies used to make biologics tend to be • KSR has already had an impact, however, on some recent federal circuit court decisions that were favorable to generics companies, Sandercock and other speakers noted in a series of panels on patent law held at a recent meeting of the New York Biotechnology Association. In these cases, appeals courts, citing KSR, overturned lower court rulings that supported innovators. • In September 2007, for example, a federal appeals court overturned a lower court decision upholding a key patent covering the Sanofi-Aventis blood pressure medication Altace, which is a particular form of a compound known as ramipril. According to Sandercock, the district court had earlier decided that the Altace patent was valid because it wasn't obvious, but the appeals court, citing KSR, said that someone with knowledge of ramipril could have thought of the design structure of Altace. The winner in this case was Lupin Pharmaceuticals, an Indian company, which launched a generic Altace on June 10. • In addition to Sanofi, U.S.-based King Pharmaceuticals was a loser, because it markets Altace in the United States. Standard & Poor's Equity Analyst Herman Saftlas estimates King stands to see 2008 revenues decline as much as 30% from 2007 because of generic competition to Altace, which generates about 33% of its sales. • At worst, KSR could result in shorter exclusivity periods for innovative drugs, putting additional pressure on pharmaceutical companies to get faster returns on investment for their drugs. KSR is likely, for example, to make it harder for innovator drug companies to obtain so-called life-cycle management and follow-on patents, says John Isacson, also a partner at Proskauer Rose. These kinds of patents cover mostly minor modifications of existing compounds and are commonly used by innovator companies to extend the exclusivity of a product franchise. • Another pharmaceutical dynamic at risk due to KSR is the 30-month stay. By law, the FDA has to delay approval of a new generic drug for up to 30 months if a patent challenge is filed involving that drug. KSR, however, could lead to shorter 30-month stays -- hence shorter effective patent life -- because it would allow litigation to proceed much faster, Isaacson notes. • Sandercock says that as a result of KSR, companies may have to provide more proof that their invention is innovative. Wendy Rieder, general counsel and VP, intellectual property at Synta Pharmaceuticals, a biotechnology firm, observed in a presentation at the NYBA meeting that post-KSR, Synta's strategy will be to provide more proof that an invention is not obvious, including more disclosure of experimental data and scientific rationale and add more claims. S&P VIDEO ON THE WEB
S&P GSCI Commodity Update: June 2008
Monday, July 7: GSCI Commodities Update
• S&P Equity Research reviews the performance of the commodities index. • Go to http://www.equityresearch.standardandpoors.com, and check out our video line up MORNING BRIEFING
on the right navigation bar to catch this and other presentations. You can also try clicking on the link below, or copy and paste the flowing URL into your browser: mms://a1802.v19724b.c19724.g.vm.akamaistream.net/7/1802/19724/v0001/streamlogics.download.akamai.com/25711/S_and_P/sptv-markets-174.wmv S&P’S WEEK AHEAD
Earnings Kick Off Tuesday; Fed Officials Speaking on Economy
MONDAY Earnings include: No major companies to report. Economics: Fed’s Yellen speaks in San Diego on
U.S. economic outlook.
TUESDAY Earnings
include:
Alcoa (AA $32 ***; Large-Cap Value); Helen of Troy (HELE $16 ***; Small-Cap Growth); Pepsi
Bottling (PBG $28 ***; Large-Cap Blend); Sealy (ZZ $6 ***; Small-Cap Blend). Economics: Fed Chairman
Bernanke speaks at FDIC forum on mortgage lending; Fed’s Jeffrey Lacker speaks in Washington on economic
outlook. ICSC-UBS 07/05; Redbook 07/05; Wholesale Inventories & Sales – May; Pending Home Sales Index –
May; Consumer Credit – May; ABC Consumer Comfort 07/06.
WEDNESDAY Look for the weekly S&P Equity Analyst Corner (www.standardandpoors.com) with S&P equity analyst Chris Muir
who will talk about his Focus Stock of the Week. Earnings include: International Speedway (ISCA- Cl. A $39 ***;
Mid-Cap Growth); Ruby Tuesday (RT $5 *; Mid-Cap Growth); Shaw Group (SGR $58 ***; Mid-Cap Blend).
Economics: MBA Mortgage Applications 07/04; EIA Crude Oil, Gasoline, & Distillates Stocks 07/04.
THURSDAY Earnings
include:
Chattem (CHTT $66 ***; Small-Cap Growth); Emmis Communications (EMMS $2 ***; Small- Cap Value); Lawson Software (LWSN $7 *****; Mid-Cap Blend); Marriott (MAR $25 ***; Large-Cap Growth).
Economics: Bernanke and Treasury Secretary Paulson testify on markets before House Committee. Initial
Claims 07/05; State Benefits 06/28; EIA Natural Gas Stocks 07/04; M2 - Week Ended 06/30.
FRIDAY Earnings
include:
Fastenal (FAST $42 *****; Mid-Cap Growth); General Electric (GE $27 ****; Large-Cap Blend); Rockwell Collins (COL $48 ****; Large-Cap Growth). Economics: Trade: Goods & Services – May; Goods &
Services Imports & Exports (BOP) – May; Import (& Index x-Petro) & Export Price Index – June; Michigan
Sentiment Prelim. – July; Treasury Budget – June.
MORNING BRIEFING

Glossary
S&P STARS - Since January 1, 1987, Standard & Poor’s Equity
Standard & Poor’s Equity Research Services – Standard &
Research Services has ranked a universe of common stocks based on Poor’s Equity Research Services U.S. includes Standard & Poor’s a given stock’s potential for future performance. Under proprietary Investment Advisory Services LLC; Standard & Poor’s Equity STARS (STock Appreciation Ranking System), S&P equity analysts Research Services Europe includes Standard & Poor’s LLC- London rank stocks according to their individual forecast of a stock’s future and Standard & Poor’s AB (Sweden); Standard & Poor’s Equity total return potential versus the expected total return of a relevant Research Services Asia includes Standard & Poor’s LLC’s offices in benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe Hong Kong and Singapore, Standard & Poor’s Malaysia Sdn Bhd, 350 Index or S&P 500 Index)), based on a 12-month time horizon. and Standard & Poor’s Information Services (Australia) Pty Ltd. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective. Abbreviations Used in S&P Equity Research Reports
S&P Quality Rankings (also known as S&P Earnings &
Dividend Rankings)- Growth and stability of earnings and
dividends are deemed key elements in establishing S&P’s earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be EBIT- Earnings Before Interest and Taxes noted, however, that the process also takes into consideration certain EBITDA- Earnings Before Interest, Taxes, Depreciation and adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings: S&P Issuer Credit Rating - A Standard & Poor’s Issuer Credit
Rating is a current opinion of an obligor’s overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor’s capacity and willingness to meet its SG&A- Selling, General & Administrative Expenses financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and
enforceability of the obligation. In addition, it does not take into
account the creditworthiness of the guarantors, insurers, or other
forms of credit enhancement on the obligation. The Issuer Credit
Rating is not a recommendation to purchase, sell, or hold a financial
obligation issued by an obligor, as it does not comment on market
price or suitability for a particular investor. Issuer Credit Ratings are
based on current information furnished by obligors or obtained by
Standard & Poor’s from other sources it considers reliable. Standard
& Poor’s does not perform an audit in connection with any Issuer
Credit Rating and may, on occasion, rely on unaudited financial
information. Issuer Credit Ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
S&P Core Earnings - Standard & Poor's Core Earnings is a
uniform methodology for adjusting operating earnings by focusing on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or
amortizable operating assets, purchased research and development,
M&A related expenses and unrealized gains/losses from hedging
activities. Excluded from the definition are pension gains,
impairment of goodwill charges, gains or losses from asset sales,
reversal of prior-year charges and provision from litigation or
insurance settlements.
S&P 12 Month Target Price – The S&P equity analyst’s projection
of the market price a given security will command 12 months hence,
MORNING BRIEFING
based on a combination of intrinsic, relative, and private market Required Disclosures
by SPIAS, which is also registered in Korea as a cross-border
investment advisory company.
S&P Global STARS Distribution
The research and analytical services performed by SPIAS, S&P LLC, S&P AB, S&PM, and SPIS are each conducted separately In the U.S.
from any other analytical activity of Standard & Poor’s. As of March 31, 2008, research analysts at Standard & Poor’s
Equity Research Services U.S. recommended 34.2% of issuers
Standard & Poor's or an affiliate may license certain intellectual with buy recommendations, 57.3% with hold recommendations
property or provide pricing or other services to, or otherwise have a and 8.5% with sell recommendations.
financial interest in, certain issuers of securities, including exchange-traded investments whose investment objective is to In Europe
substantially replicate the returns of a proprietary Standard & Poor's As of March 31, 2008, research analysts at Standard & Poor’s
index, such as the S&P 500. In cases where Standard & Poor's or an Equity Research Services Europe recommended 47.0% of
affiliate is paid fees that are tied to the amount of assets that are issuers with buy recommendations, 36.3% with hold
invested in the fund or the volume of trading activity in the fund, recommendations and 16.7% with sell recommendations.
investment in the fund will generally result in Standard & Poor's or an affiliate earning compensation in addition to the subscription fees or other compensation for services rendered by Standard & Poor’s. As of March 31, 2008, research analysts at Standard & Poor’s
A reference to a particular investment or security by Standard & Equity Research Services Asia recommended 50.4% of issuers
Poor’s and/or one of its affiliates is not a recommendation to buy, with buy recommendations, 42.5% with hold recommendations
sell, or hold such investment or security, nor is it considered to be and 7.1% with sell recommendations.
Globally
Standard & Poor's and its affiliates provide a wide range of services As of March 31, 2008, research analysts at Standard & Poor’s
to, or relating to, many organizations, including issuers of securities, Equity Research Services globally recommended 37.1% of
investment advisers, broker-dealers, investment banks, other issuers with buy recommendations, 53.4% with hold
financial institutions and financial intermediaries, and accordingly recommendations and 9.5% with sell recommendations.
may receive fees or other economic benefits from those organizations, including organizations whose securities or services 5-STARS (Strong Buy): Total return is expected to outperform the
they may recommend, rate, include in model portfolios, evaluate or total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total
For a list of companies mentioned in this report with whom Standard return of a relevant benchmark over the coming 12 months, with & Poor’s and/or one of its affiliates has had business relationships shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/ the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total
Disclaimers
return of a relevant benchmark over the coming 12 months, and the This material is based upon information that we consider to be
share price is not anticipated to show a gain. reliable, but neither S&P nor its affiliates warrant its
1-STARS (Strong Sell): Total return is expected to underperform
completeness, accuracy or adequacy and it should not be relied
the total return of a relevant benchmark by a wide margin over the upon as such. With respect to reports issued to clients in Japan
coming 12 months, with shares falling in price on an absolute basis. and in the case of inconsistencies between the English and
Japanese version of a report, the English version prevails.
Relevant benchmarks: In the U.S. the relevant benchmark is the Neither S&P nor its affiliates guarantee the accuracy of the
S&P 500 Index, in Europe and in Asia, the relevant benchmarks are translation. Assumptions, opinions and estimates constitute our
generally the S&P Europe 350 Index and the S&P Asia 50 Index. judgment as of the date of this material and are subject to
change without notice. Neither S&P nor its affiliates are
For All Regions:
responsible for any errors or omissions or for results obtained
All of the views expressed in this research report accurately
from the use of this information. Past performance is not
reflect the research analyst's personal views regarding any and
necessarily indicative of future results.
all of the subject securities or issuers. No part of analyst
compensation was, is, or will be, directly or indirectly, related to
This material is not intended as an offer or solicitation for the the specific recommendations or views expressed in this
purchase or sale of any security or other financial instrument. research report.
Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are Additional information is available upon request.
given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or Other Disclosures
income from any securities or investments mentioned in this report This report has been prepared and issued by Standard & Poor’s
may fall against the interests of the investor and the investor may get and/or one of its affiliates. In the United States, research reports
back less than the amount invested. Where an investment is are prepared by Standard & Poor’s Investment Advisory
described as being likely to yield income, please note that the Services LLC (“SPIAS”). In the United States, research reports
amount of income that the investor will receive from such an are issued by Standard & Poor’s (“S&P”); in the United
investment may fluctuate. Where an investment or security is Kingdom by Standard & Poor’s LLC (“S&P LLC”), which is
denominated in a different currency to the investor’s currency of authorized and regulated by the Financial Services Authority; in
reference, changes in rates of exchange may have an adverse effect Hong Kong by Standard & Poor’s LLC, which is regulated by
on the value, price or income of or from that investment to the MORNING BRIEFING
the Hong Kong Securities Futures Commission; in Singapore by
investor. The information contained in this report does not constitute Standard & Poor’s LLC, which is regulated by the Monetary
advice on the tax consequences of making any particular investment Authority of Singapore; in Sweden by Standard & Poor’s AB
decision. This material is not intended for any specific investor and (“S&P AB”); in Malaysia by Standard & Poor’s Malaysia Sdn
does not take into account your particular investment objectives, Bhd (“S&PM”), which is regulated by the Securities
financial situations or needs and is not intended as a Commission; in Australia by Standard & Poor’s Information
recommendation of particular securities, financial instruments or Services (Australia) Pty Ltd (“SPIS”), which is regulated by the
strategies to you. Before acting on any recommendation in this Australian Securities & Investments Commission; and in Korea
material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. For residents of the U.K. –this report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, respectively. For residents of Malaysia, all queries in relation to this report should be referred to Alexander Chia, Desmond Ch’ng, or Ching Wah Tam. MORNING BRIEFING

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