EFTA00726452.pdf

UBS Investment Research UBS Business Jet Survey Gauging the Impact of Europe • Survey of bizjet contacts We recently surveyed our business jet contacts to get a sense of European business jet market conditions and the potential impact of a stronger dollar. We estimate Europe accounts for roughly 25% of business jet demand (on deliveries) with Dassault most exposed to Europe and Gulfstream least exposed. • Europe looks to have weakened The European market looks to have weakened from an already low level with half of our survey respondents indicating deterioration over the past couple of months. On currency, only a small fraction of our participants see the stronger dollar having a significant impact on demand with 75% calling for a moderate impact. Overall, our respondents overwhelmingly see weakness in the European economies as a much bigger risk factor than currency. • GD pricing Gulfstream at <10: With GD off more than the market and current levels implying less than 10x EPS for Gulfstream, we think Europe risk is more than reflected. We continue to believe that GD's defense businesses, particularly Combat Systems, will hold up better than expected and despite European weakness think Gulfstream will grow on initial G650 deliveries and improvement at Jet. Our Neutral rating on TXT reflects concerns over the shape of the recovery at Cessna given significant oversupply, fractional weakness and increased competition at the low-mid end. Global Equity Research Americas Aerospace Sector Cerement 3 June 2010 wnw.ubs.corwinvestrrentresearch David E. Strauss Analyst Ciistina Fernandez Anahst Darryl Genovesi Assccate Ana I Chart 1: Indication of Deterioration in European Bizjet Market Chart 2: Expected Impact from Stronger US Dollar No 49% Yes Sigrillcaot Impact No Impact ?A st i 6% Moderate Impact 75% Source: UBS Business Jet Survey Source: UBS Business Jet Survey This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 7. UBS 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 shotid consider this report as only a single factor in making their investment decision. EFTA00726452 UBS Business Jet Survey 3 June 2010 Investment Summary We recently surveyed our business jet contacts to get a sense of European business jet market conditions and the potential impact of a stronger dollar. We estimate Europe accounts for roughly 25% of business jet demand (on deliveries) with Dassault most exposed to Europe and Gulfstream least exposed. It would appear that the business jet market in Europe has weakened from an already low level with half of our survey respondents indicating that the European market has deteriorated over the past couple of months. We do expect economic weakness in Europe and a stronger dollar to negatively impact the shape of the business jet recovery. We continue to call for a more muted recovery than we have seen in prior upturns given all-time high levels of available for sale aircraft, tighter lending standards, excess inventory in the fractional fleets and the likelihood for continued low levels of order activity. Chart 3: Deliveries to Europe - % of Total Industry Deliveries Chart 4: Deliveries to Europe % of Total by Manufacturer 30% 25% 20% 15% 10% 5% 0% out ■ 504/stem Europe S Easiem Europe 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2 v§ Manufactrer Average 210510 —Indusby Average Source: JETNET Sane: JETNET The dollar has strengthened by roughly 20% year to date relative to the Euro. The weaker Euro implies an effective purchase price that is 25% higher from the perspective of a potential European buyer since aircraft transactions are typically priced in US dollars. Chart 5: Pound and Euro Exchange Rates $2.10 $190 $1.70 $1.50 51.30 $1.10 A li 8 8 8 8 8 8 4 g ig 2 4 k -GBP-USD - EUR-USD o o Source FaciSet UBS 2 EFTA00726453 UBS Business Jet Survey 3 June 2010 However, only a small fraction of our survey respondents see the stronger dollar having a significant negative impact on demand with 75% calling for a moderate impact. Overall our respondents overwhelmingly see weakness in the European economies as a much bigger risk factor than currency. Chart 6: Expected Impact from Stronger US Dollar Chart 7: Bigger Risk to European Market Sagicant Struve( knpact No Impact Ddlar 9% / 1- 16% 10% Moderale Impact 15% Economic Recovery 90% Source: UBS Business Jet Survey Source: UBS Business Jet Survey With GD off more than the market and current levels implying less than l0x EPS for Gulfstream, we think Europe risk is more than reflected. We continue to believe that GD's defense businesses, particularly Combat Systems, will hold up better than expected and despite Europe weakness think Gulfstream will grow on initial G650 deliveries and improvement at Jet. Our Neutral rating on TXT reflects concerns over the shape of the recovery at Cessna, given significant oversupply, fractional weakness, and increased competition at the low-mid end (Embraer). Among the suppliers, Buy rated COL is our preferred play on business jets. Chart 8: GD and TXT Forward PIE Multiples 30x 25x 20x a. 15x 1 10x LL 5x Ox O 6 -GD TXT Note: Road FE using roping 12-month (Waal) EPS through March 2010 and UBS estinates br future periods. Source: UBS estimales UBS 3 EFTA00726454 UBS Business Jet Survey 3 June 2010 Survey Participant Profile Of the 109 market professionals who responded to our survey, a majority (58%) are broker/dealers. Brokers/dealers are involved in the purchase and sale of both new (direct from manufacturer) and used aircraft, often purchasing on spec. Chart 9: Business Jet Market Survey—Participant Role Other 17% Manufacturer 12% DealeaBroker 58% Financier 13% Note: Other incbdes appraisers. fracaorol providers. management. charter. FBO and IAFtO service providers. Source: UBS Business Jet Survey The majority of our participants are located in North America (70%), although most transact a significant proportion of their business with foreign customers. Roughly one fourth of our participants are located in Europe. Similarly, European customers represent roughly one fourth of our participants' business in line with recent proportion of total business jet deliveries. Chart 10: Business Jet Market Survey—Participant Location Chart 11: Geographic Distribution of Participants' Customers Lath Am enca Asia & 3% Pacific 2% Europe 23% Middle East & Africa 2% Not Amelia 70% Source: UBS Business Jel Survey Lath America 10% Asia & Pacilc 7% Europe 25% Middle East & Mica 7% North America 51% Source: UBS Business Jet Survey Survey Results Market Conditions in Europe In the first question, we asked, "Has the European market deteriorated relative to a few months ago?" Of the 100 responses (nine participants did not respond to this question), 51% indicated that the European market has deteriorated over the past few months, while 49% indicated that it has not. Weighting the responses according to individual participants' exposure to the European market, the result was slightly more positive with 41% indicating that the European market has deteriorated and 59% indicating that it has not. UBS 4 EFTA00726455 UBS Business Jet Survey 3 June 2010 Chart 12: Indication of Deterioration In European Bizjet Market Chart 13: Weighted by Participants' Exposure to Europe Yes No 49% Yes 51% No 41% Source: UBS Business Jet Survey Source: UBS Business Jet Survey Impact of Stronger Dollar In the next question, we asked, "How big of a negative impact do you expect to see on international activity as a result of the strong dollar?" Of the 107 responses (two participants did not respond to this question), 16% indicated that they do not expect any impact, while 75% expect a moderate impact and 9% expect a significant negative impact. Weighting the responses according to individual participants' exposure to the European market, the result was slightly more pessimistic with 9% indicating that they do not expect any impact, 79% indicating that they expect a moderate impact and 12% indicating that they expect a significant negative impact from the stronger dollar. Chart 14: Impact Expected from Stronger US Dollar Chart 15: Weighted by Participants' Exposure to Europe Signicaf". impact No Impact St% 16% Modara Impact 75% Sigritcant Impact 12% No russet 9'. Samos: UBS Businessan Survey Source: UBS Busness Jet Survey In the next question, we asked, "Which of these two factors is a bigger risk to the European market?" Respondents were asked to choose between "Strengthening Dollar" and "Outlook for slower economic recovery." Of the 105 responses (four participants did not respond to this question), 90% indicated "Outlook for slower economic recovery" as the bigger risk to the European business jet market, with only 10% indicating "Strengthening dollar". Weighting the responses according to individual participants' exposure to the European market, the results were roughly unchanged. UBS S EFTA00726456 UBS Business Jet Survey 3 June 2010 Chart 16: Bigger Risk Factor Chart 17: Weighted by Participants' Exposure to Europe Stronger Dollar 10% Slow Dos Economic Eccnomtc Recovery Recovery 90% 90% Source: UBS Business Jet Survey Stronger Dollar Source: ues Burrito= Jet Swvey Commentary The following are selected comments from business jet professionals. la 1 think the general concern of problems in Greece, Portugal and other areas is having an impact on potential sales activity on the European continent and in other markets as well. • Only South America seems to remain relatively unaffected. • Commercial operators are coming under pressure. Their payment schedules were extended last year and leases re-negotiated in the hope of an upturn in 2010. Now payment-day nears without a significant change in the market. • There is oversupply on the Balkans and in Central Europe, especially in the light jet category. • Buyers are concerned over the banking sector and possibility of a "double- dip" and more corporate failures. ■ The strong US Dollar is a positive for sellers in Europe (and there are lots of sellers). ■ This situation with the Greek bailout has caused uncertainty throughout the Euro-zone. ■ Buyers are noticeably more cautious as they see a dark cloud on the horizon. • The strong Dollar has a larger negative impact on new aircraft sales than it does on the used market. ■ Currently the Eastern European market is the strongest in Europe with increasing demand in recent months. ■ European banks seem more active right now than US banks (especially for European and Middle Eastern clients) is Anecdotal signals from the top-end suggest buyers are well-hedged already against currency fallout. This may not be the case for medium and below purchasers. UBS EFTA00726457 UBS Business Jet Survey 3 June 2010 ■ Aircraft markets abhor uncertainty, and there is risk that the current debt crisis could lead to an unravelling of pan-European monetary and economic policy coordination. ■ The stronger dollar will have a significant effect on the European market. ■ Potential buyers are concerned that serious issues in Europe will impact the rest of the world. ■ The recent disruption has made American buyers as nervous as the Europeans for sure. ■ We were expecting an LOI from a European buyer following detailed negotiations. However, the Greek debt crisis and ensuing weakening in the Euro have kept that LOI from coming to fruition. ■ Buyers are fearful of the impact of the debt crisis in Greece, Portugal, Spain, etc. and that it might spread to other parts of Europe and even across the Atlantic to the U.S. ■ Statement of Risk The business jet market is cyclical in nature, largely driven by the general economic environment. Business jet manufacturers' earnings and cash flow are dependent on end-user demand, availability of customer financing, program execution and inventory management. A weak market for business jets could negatively affect General Dynamics, Textron, Bombardier, Embraer, Rockwell Collins, Honeywell, B/E Aerospace, Rolls-Royce and United Technologies. ■ Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (I) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. ues 7 EFTA00726458 UBS Business Jet Survey 3 Jule 2010 Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit Ivww.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverage' IB Services Buy Neutral Sell Buy Hold/Neutral Sell 50% 40% 11% 39% 33% 24% UBS Short-Term Rating Rating Category Coverage IB Services' Buy Sell Buy Sell less than 1% less than 1% 29% 0% 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2010. UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. Buy Sell U8S 8 EFTA00726459 UBS Business Jet Survey 3 June 2010 KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of. the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management. performance record, discount: Sell: Negative on factors such as structure, management. performance record. discount. Core Banding Exceptions (CBE): Exceptions to the standard +1-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company. public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any. follows. UBS Securities LLC: David E. Strauss; Cristina Fernandez; Darryl Genovesi. Company Disclosures Company Name General Dynamics Corp. Rockwell Collins Inc.` s,6 6b. 6C 7,6. 16. ILI S. Olt 61". 6c. 7. It Textron Inc.`' Reuters 12-mo rating Short-term rating Price Price date GD.N COL.N TXT.N Buy Buy Neutral N/A N/A N/A US$67.92 US$58.63 US$20.47 02 Jun 2010 02 Jun 2010 02 Jun 2010 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. UBS 9 EFTA00726460 UBS Business Jet Survey 3 Jute 2010 18a. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Rockwell Collins Inc. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Textron Inc. Unless otherwise indicated. please refer to the Valuation and Risk sections within the body of this report. General Dynamics Corp. (US$) — Ate Typo (US$) — Sloth Mb) (1.1%) 0 0 1 .9 9 `49: z ' 4) g. I I" )1 2 $ 7/ m 3 If g ii c g 4 • / 4 I 1 4 I g 1 4 I g 1 ? 1 'a G G G G G 6 G • 6 G G G G G G a I I I I I I I I I I I I I I I I I I I Buy 2 BJY MOM No Rath° -01.Ien10 - rd Source: UBS; as of 02 Jun 2010 Rockwell Collins Inc. (US$) — Ate Taipei (US$) — Bock Pike (US$) 0 .43 Buy t Neutral ' Br 1 1 1 1 1 1 1 3 I I I I $ $ 15 4 i i $ i i 6I I I 1 1 1 1 1 1 1 1 1 1 1 I I I I I I 3 R2s $ $ '3 6 3 -01an-10 Source: UBS: as of 02 Jun 2010 ii3S10 EFTA00726461 UBS Bushels Jet Survey 3June2010 Textron Inc. (US$) Moe Twee (US$) — Stock Moe (US$) 600 40r 20D- 0.0 I MEI Buy' R4 Neutral No Ralhg I I I I I I I I I I I I I I 4) rf I V 2 g i ll 2 W. S a G G G S G G G S I I Source: UBS; as of 02 Jun 2010 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of 'Z means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%. 1J€S 11 EFTA00726462 UBS Bushes Jel Surrey 3 Jule 2010 Global Disclaimer The report has been prepared by UBS Scoops LLC. an Wean d UBS AG. OBS AG Os subsichanes. brancros and aflame' aro referred to harem as OBS. In canon ccunIncs. UBS AG is referred SO 88 MS SA. This report is br chstrbuton only under such a:commences as may be permitted by appleobb law Naming in this report constoAos a represemanan that any investment strategy or recommendation contained herein is astable or appropriate m a reeperts Induiduil uraratancas a menu° cratilutes a personal recommenexcn. 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