US Equity Research: Quantifying Euro Exposure

North America Equity Research
12 May 2010
US Equity Research
Quantifying Euro Exposure
US Equity Strategy
AC
Thomas J Lee, CFA
(1-212) 622-6505
thomas.lee@jpmorgan.com
J.P. Morgan Securities Inc.
For a complete list of contributors

to this report, please see complete
table of contents on page 3.
Contents
Macro................................................................... 5
Capital Goods/Industrials .................................. 11
Consumer .......................................................... 17
Energy ............................................................... 27
Financial ............................................................ 29
Health Care ....................................................... 33
Materials ............................................................ 37
Media & Telecom............................................... 41
Technology ........................................................ 45
See page 54 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Americas Equity Research J.P. Morgan MAP
May 2010 Quantifying Euro Exposure
2
Table of Contents
Macro
Global FX Strategy (John Normand) ............................................................................5
Equity Strategy (Tom Lee)............................................................................................7
Capital Goods/Industrials
Aerospace & Defense (Joseph B. Nadol III) ...............................................................11
Airfreight & Surface Transportation (Thomas R. Wadewitz) .......................................12
Electrical Equipment & Multi-Industry (C. Stephen Tusa, Jr.).....................................13
Engineering & Construction (Scott Levine).................................................................14
Environmental Services (Scott Levine).......................................................................15
Machinery (Ann Duignan)...........................................................................................16
Consumer
Apparel/Textile Manufacturers (Christopher Kim).......................................................17
Autos & Auto Parts (Himanshu Patel) ........................................................................18
Beverages (John Faucher) .........................................................................................19
Broadlines & Food Retailing (Charles Grom) .............................................................20
Gaming & Lodging (Joseph Greff)..............................................................................21
Hardlines Retailing (Christopher Horvers) ..................................................................22
Homebuilding & Building Products (Michael Rehaut) .................................................23
Household Products & Personal Care (John Faucher)...............................................24
Packaged Food (Terry Bivens)...................................................................................25
Tobacco (Rae Maile) ..................................................................................................26
Energy
Alternative Energy (Christopher Blansett) ..................................................................27
Electric Utilities & Independent Power Producers (Andrew Smith).............................28
Financial
Asset Managers (Kenneth B. Worthington) ................................................................29
Large Cap Banks (Vivek Juneja) ................................................................................30
US Exchanges (Kenneth B. Worthington) ..................................................................31
3
Health Care
Life Science Tools & Diagnostics (Tycho W. Peterson) .............................................33
Medical Supplies & Devices (Michael Weinstein).......................................................34
Pharmaceuticals (Chris Schott) ..................................................................................35
Materials
Chemicals (Jeffrey J. Zekauskas) ..............................................................................37
Metals & Mining (Michael F. Gambardella).................................................................38
Paper & Packaging (Claudia Shank Hueston)............................................................39
Media & Telecommunications
Advertising & Marketing Services and Publishing (Alexia Quadrani)..........................41
Information Services & Broadcasting (Michael Meltz) ................................................42
Internet (Imran Khan) .................................................................................................43
Technology
Business Services (Andrew Steinerman) ...................................................................45
Communications Equipment & Data Networking (Rod Hall).......................................46
Computer Services & IT Consulting (Tien-tsin Huang) ...............................................47
IT Hardware (Mark Moskowitz)...................................................................................48
Semiconductors (Christopher Danely)........................................................................49
Software (John DiFucci) .............................................................................................50
Software Technology (Sterling Auty) ..........................................................................51
Disclosures.................................................................................................................54
Note: Unless otherwise noted, all stock prices and coverage lists in this
report are as of the close May 7, 2010, and target prices for December 2010.
4
Global FX Strategy
Macro
FX Outlook: Euro Moves from Crisis Currency to Funding Currency
John Normand AC Euro-area governments and the ECB have laid out an unprecedented set of measures
(44-20) 7325-5222
john.normand@jpmorgan.com
to safeguard financial stability in the Euro area. Assuming national-level approval,
this package minimizes the odds of a credit event in Europe and should stabilize
J.P. Morgan Securities Ltd.
EUR/USD in a 1.25-1.30 range. ECB liquidity will preserve the euro’s role as a
funding currency (and underperformer) versus higher-yield markets, but doesn’t
portend a sustained decline vs. USD until Fed tightening is more imminent.
By reducing one of three systemic risks most investors fear – the others being a hard
landing in China and Fed tightening – this package should renew the uptrend in
high-yield and commodity currencies versus USD, EUR, and JPY. As benchmarks,
expect USD/CAD to fall to 0.95, AUD/USD to rise to 0.99, and NZD/USD to rise to
0.74 by Q3.
These measures have little impact on sterling, which should underperform most
currencies due to the dramatic fiscal tightening the future government must
implement. Versus USD, however, sterling should trade in a 1.40-1.50 range.
The yen would weaken modestly given the lift to US yields which will follow any
unwinding of the flight to quality. But the yen is now vulnerable to a sovereign credit
event simply due to its debt burden. Expect USD/JPY to range between 92 and 96 for
the next three months, and to gain more upward momentum later this year as the
Treasury market anticipates Fed tightening in 2011.
There is no doubting the shock-and-awe component to the announcement on

May 9 by Euro-area governments and the ECB on measures to address the
stress in European sovereign debt and funding markets. The immediate price
action was spectacular; European equities surged by as much as 12%, Greece 10-year
bond spreads over German Bunds narrowed by over 600bps, whilst Greek 5-year
CDS tightened by over 300bps. EUR rallied strongly across the board as the
announcement was met by relief across financial markets that Euro-area finance
officials had finally gotten their collective act together.
The market reaction to the refusal by the ECB to announce policy measures at
the May 6 rate decision effectively forced Euro-area officials into a corner. With
bond and credit spreads in peripheral Europe widening significantly, policymakers
were left with little choice but to provide such extraordinary liquidity measures
announced on May 9. The question now for investors is how this will impact EUR
and the rest of the currency markets over the coming months. Such extraordinary
policy measures are, of course, not without precedent. The global financial crisis
witnessed a significant injection of liquidity into the global financial system as well
as the establishment of swap lines between the Fed and other central banks around
the world as well as varying degrees of quantitative easing being undertaken. Those
events of not so long ago provide some indicators on the possible direction of EUR
over the coming months.
ECB Reinstates Liquidity Facilities/Fed Extends Swap Lines

Both the above measures were seen as the most likely first steps in a policy to bring
calm to the markets. The three-month tenders in May and June will return to a full
allotment at the 1% policy rate. A six-month tender will be conducted in May, with
full allotment at the average minimum bid rate of the weekly operations over the six-
5
month period. Though this may have stopped the hemorrhaging of the European
financial markets and alleviated some of the near-term tail risks, EUR/USD is back
to where it started before the May 9 announcement. Central bank balance sheet
expansion is usually currency negative – witness the dollar’s swift and broad decline
in the months following the Fed’s announcement of QE in spring 2009 – but the
ECB’s undertaking looks much tamer. Unlike the Fed, the ECB has set no target for
asset purchases, which may indeed prove limited. Neither has it set quantitative
reserve targets for banks as the Bank of Japan did during its QE experience in the
2000s. Offsetting these measures somewhat is the Fed’s reopening of USD swap
lines. While the eventual sums for these various injections are unknown, we suspect
they will be modest and that the bulk of any European assistance for the periphery
will come in fiscal form from the European Stabilization Mechanism. With the
liquidity injection probably lower than feared, EUR/USD should move in a 1.25-1.30
range this summer. The euro has more downside as the Treasury market begins to
discount greater Fed tightening, but that move still looks several months away. When
it does occur, EUR/USD should head to the low 1.20s.
The chief beneficiaries of Europe’s measures are high-yield and commodity

currencies, most of which have been more vulnerable to systemic shocks than local
developments this year. With the odds of a European credit event much removed,
these currencies should retake their 2010 highs and even exceed them. Roughly 4-6%
spot moves are likely by the fall, which implies for example USD/CAD at 0.95,
AUD/USD at 0.99, and NZD/USD at 0.74. The euro should continue to
underperform these currencies since the ECB’s policy stance should sustain interest
in using the euro as a funding currency versus more cyclical currencies – commodity
FX and emerging markets.
Many continue to expect the yen to fall victim next to sovereign stress, but this
bearishness misreads how government debt sinks currencies. The channel is through
default risk, rising inflation expectations/falling real yields, or a widening current
account deficit. All three of these outcomes are difficult to generate in Japan, where
the bond market is domestically dominated, deflation entrenched, and the current
account in surplus due to a booming global economy. USD/JPY will trend higher,
but only once US rates do. For the next several months it should move in a 92-96
range, but fall much more versus commodity currencies and emerging markets.
6
Equity Strategy
Euro Is Weakening, Upside to Eurozone GDP Recovery
Thomas J Lee, CFA AC Euro Has Weakened Against Most Currencies, But the USD
(1-212) 622-6505
thomas.lee@jpmorgan.com
Has Been Stable
Bhupinder Singh Currency volatility has risen in 2010, reflecting differences in regional growth, fiscal
(1-212) 622-6406 balances, as well as the effects of quantitative easing. The weakness stems from
bhupinder.b.singh@jpmorgan.com multiple factors – weaker cyclical growth, sovereign concerns (at one point, potential
Daniel McElligott dissolution of the EU as well), and, most recently, the effects from the ECB
(1-212) 622-5598 quantitative easing.
daniel.mcelligott@jpmchase.com
• Ultimately, John Normand, J.P. Morgan FX Strategist, believes the EUR/USD
should stabilize in the 1.25-1.30 band (a 4% range), down from 1.43 at the start
of the year. If the US Fed begins tightening, then he sees a new lower end for
Sector Ratings that range.
Cyclicals
Industrials...............................................OW The EUR has weakened vis-à-vis other currencies (see Figure 1), but the USD has
Materials ...............................................OW been relatively stable (USD strengthened against EUR, ₤, and Swiss franc). Thus,
Technology ...........................................OW
Discretionary .........................................OW
we do not see a weaker EUR as a threat to US equities or the profit outlook of US
Defensives companies (which sell to a broader market than just Eurozone).
Healthcare..................................................N
Telecom .....................................................N
Figure 1: EUR vs. Other Currencies – USD vs. Other Currencies
Staples .................................................. UW % change since start of year
Utilities .................................................. UW
US Dollar v s. Major Currencies
Other Euro v s. Major Currencies
Financials...............................................OW Euro 11%
Energy....................................................OW British Sterling -4%
British Sterling 7%
Sw iss Franc -5%
Sw iss Franc 7%
Chinese Renminbi -11%
Chinese Renminbi 0%
US Dollar -13%
Japanese Yen 0%
Japanese Yen -13%
Australian Dollar 0%
Australian Dollar -13%
Canadian Dollar -3%
Canadian Dollar -17%
-14% -4% 6% 16%

-20% -10% 0%
YTD Change
YTD Change
Source: J.P. Morgan Dataquery.
7
Multi-National Cyclicals Would Underperform if EUR

Continues to Weaken . . . .
But a weaker EUR makes Eurozone products more competitive in other currencies,
hence, improving the export story for Eurozone industrials. If the EUR continues to
weaken, the competitive position of US multi-national cyclicals is affected. For
instance, take a look at Figure 2 below; US Cyclicals tend to underperform when the
EUR weakens (6-month change for both).
• John Normand is forecasting stability of the EUR, rather than further weakening,
which, in this case, suggests that the underperformance of Cyclicals (vs.
Defensives) would be short-lived.
Figure 2: Comparative Performance – Cyclicals/Defensives vs. EUR/USD
Six-month % change
One can see that a weaker
EUR tends to lead to Cyclicals EUR 6-mo chg Cy cl v s. Def 6-mo chg
underperforming Defensives. 3150 bp
25%
But this weakness in EUR
could be short-lived . . . .
Cyclicals vs. Defensives 6-mo chg

2150 bp
15%
1150 bp
EUR 6-mo chg
5%
150 bp
-5%
-850 bp
-15%
-1850 bp
-25% -2850 bp
1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10
Source: J.P. Morgan and Bloomberg.
MARKET STRATEGY: Focus on Domestic Cyclicals, But

Defensives Gain if EUR Weakens Further . . . .
We still see the S&P 500 reaching 1300 by YE10, based on ’11E EPS of $90. The
US domestic cyclical recovery continues to be strong, reflected most recently in the
strong April payrolls report (private payrolls expanded by 231k) and the NFIB
optimism index, which reached its highest levels since September 2008.
• Given the uncertainty and volatility of the EUR, and the relatively visible US
cyclical recovery, this further supports our stance to favor Domestic Cyclicals
over Multi-Nationals – namely, Financials, Consumer Discretionary, Small-
Cap Industrials, Housing Food Chain (Builders, etc.), and domestic Basic
Materials (Steels).
But if the EUR were to weaken further, past history shows this would favor a shift
towards Defensives (Health Care, Staples, Telecom Services, and Utilities). Since
this is not the base case of J.P. Morgan FX teams, we are not advocating a shift at
this time.
8
Looking at the Effect of a Weaker Euro across Industries

We have sorted below in Figure 3 the exposures of various Industry groups to
EUR/Eurozone. Analysts have also highlighted which stocks (within each) are most
exposed and least exposed.
Figure 3: Comparative Exposure to EUR/Euro Zone
Based on JPM Fundamental Analysts
Exposure: Ticker (Rating) Sector Level Analysis
% of EUR Margin
Industry Sector JPM Analyst Most Exposure Least Exposure sales Impact
1 Alternative Energy Christopher Blansett ESLR (N) VECO (OW) 80% Avg
2 Tobacco Rae Maile PM (N) RAI (OW) 40% Avg
3 Life Science Tools & Diagnostics Tycho Peterson BRKR (OW) TMO (OW) 36% Low
4 Software Technology Sterling Auty ADSK (N) CSGS (N) 33% Avg
5 Software John DiFucci SYMC (OW); ORCL (OW); LOGM (OW); SWI (OW); 33% Avg
SY (OW) TLEO (OW)
6 IT Hardware Mark Moskowitz XRX (N) BRCD (OW) 30% Avg
7 Machinery Ann Duignan AGCO (N) NAV (N) 29% Avg
8 Chemicals Jeffrey Zekauskas ROC (OW); PLL (N) SHW (N) 28% Low
9 Beverages John Faucher CCE (N) DPS (N) 0-55% Avg
10 US Pharmaceuticals Chris Schott PFE (OW) LLY (UW) 25% Avg
11 Electrical Equip. & Multi-Industry C. Stephen Tusa WBC (OW) GNRC (N); HUBB (OW); 25% Avg
WCC (OW); WSO (OW)
12 Info Srvs & Broadcasting Michael Meltz JWa (N); SLH (OW) FDS (N); VRSK (OW) 25% Avg
13 Medical Supplies & Devices Michael Weinstein BDX (N) BCR (OW) 25% Avg
14 Apparel/Textile Manufacturers Christopher Kim WRC (N) JNY (UW) 20% Avg
15 Telecom Equipment Rod Hall ALUA (OW) QCOM (OW) 20% Avg
16 Building Products Michael Rehaut SWK (N) USG (N) 18% Avg
17 Packaged Food Terry Bivens SLE (NR) MJN (N) 17% Avg
18 Semiconductors Christopher Danely ONNN (N) MCHP (N) 16% Low
19 Hardlines Retail Christopher Horvers BBY (N); SPLS (OW); ODP OMX (OW) 0-30% Low
(OW)
20 Paper & Packaging Claudia Shank Hueston OI (OW) RKT (OW); PTV (OW) 15% High
21 Gaming and Lodging Joseph Greff HOT (OW) PNK (OW) 0-30% Low
22 Aerospace and Defense Joseph Nadol UTX (OW) SAI (N) 15% High
23 Broadlines & Food Retailing Charles Grom WMT (OW); WFMI (OW); — 0-25% Avg
SKS (OW); COST (OW)
24 HH Products and Personal Care John Faucher TUP (N) CLX (OW) 1-20% Avg
25 Transportation Thomas Wadewitz UTIW (N) UNP (OW) 0-15% Low
26 Large Cap Banks Vivek Juneja STT (N) PNC (OW); WFC (OW); BBT <10% Low
(N)
27 Business Services Andrew Steinerman MAN (OW) SFN (UW) <10% Low
28 Metals and Mining Michael Gambardella MT (OW) STLD (OW) Low Varies
29 Computer Srvs and IT Consulting Tien-tsin Huang MA (OW); ACN (OW) ADS (OW); PAYX (UW) Low Low
30 Advertising and Publishing Alexia Quadrani GCI (N) — Low Low
Source: J.P. Morgan.
9
10
Aerospace & Defense
Capital Goods/Industrials
Aerospace Is a Dollar-Denominated Business
Joseph B. Nadol AC The appreciation of the dollar relative to the euro affects our aerospace/defense
(1-212) 622-6548 coverage universe in a few different ways. First, companies with sizable European
joseph.nadol@jpmorgan.com operations in which prices and costs are denominated in local currency will see sales
Seth M. Seifman, CFA and earnings reduced. The greatest exposure to this translation risk rests with the
(1-212) 622-5597 non-aerospace businesses at United Technologies, including Otis, Fire & Security,
seth.m.seifman@jpmorgan.com and Carrier, and at Bombardier’s train business.
Rica D. Mendoza
(1-212) 622-8113 Second, since aircraft sales are dollar-denominated, non-US manufacturers face a
rica.d.mendoza@jpmorgan.com currency mismatch between sales and costs, a portion of which are locally
J.P. Morgan Securities Inc. denominated, especially for labor. The strengthening of the dollar relative to the
home currency results in higher earnings and margins, and the chief beneficiary of
Company Name Ticker Rec the weaker euro could therefore be Airbus (EAD.PA, €13.56, Not Rated), which has
Alliant Techsystems Inc. ATK OW
Boeing Company BA N struggled with euro strength for much of the past decade. We view the improvement
Bombardier BBDb.TO OW of Airbus’ competitive position that results from a weaker euro as a negative for
CACI International Inc CACI N
Comtech Telecommunications CMTL RS Boeing (BA, $66.72, N). Bombardier (Canada) and Embraer (Brazil) are the two
Embraer SA ERJ UW non-US aircraft OEMs in our coverage universe. While the strengthening of the
General Dynamics Corp. GD N
Goodrich GR N dollar has primarily occurred relative to the euro, a more generalized “flight to
Harris Corporation HRS N safety” could lead the dollar to appreciate relative to the Canadian dollar and the
L-3 Communications LLL N
Lockheed Martin LMT OW Brazilian real as well, as occurred during the financial crisis in late 2008 and early
Northrop Grumman NOC N 2009. This would benefit earnings for Bombardier (BBDb.TO, C$5.04, OW) and
Precision Castparts PCP OW
Raytheon RTN OW Embraer (ERJ, $21.94, UW), assuming such a move is not the result of a global
Rockwell Collins COL OW economic meltdown that drastically reduces aircraft demand.
SAIC SAI N
Spirit AeroSystems SPR N
United Technologies UTX OW Finally, with aircraft and major defense systems priced in dollars, the strengthening
of the dollar relative to the euro makes these items more expensive for European
customers and could therefore cut into demand.
MOST EXPOSURE: United Technologies (UTX, $69.46, OW – TP $82)

LEAST EXPOSURE: SAIC (SAI, $17.54, N – TP $18)
The US stock we follow with the highest exposure to the $/€ rate is United
Technologies. We estimate that 15-20% of sales are euro-denominated, with this
translation exposure concentrated in the company’s three non-aerospace businesses:
Otis, Fire & Security, and Carrier. We believe euro weakness has been weighing on
the stock for much of the year, eating into the contingency included in management’s
EPS guidance of $4.50-$4.65. The company estimates that each penny change in the
exchange rate results in a penny change in EPS.
While not a US stock, Bombardier has the most exposure to the euro among our
companies. Bombardier’s Transportation business accounted for 52% of FY10 sales,
and we estimate that ~70% of its revenue is euro-denominated, creating a significant
translation exposure to the strengthening of the dollar relative to the euro.
We are not aware of significant moves by UTX or Bombardier to hedge their euro
exposure.
While nearly all of our defense names look relatively immune to the strengthening of
the dollar vs. the euro, SAIC looks especially isolated from this issue. 89% of FY10
sales were to the US government, mainly for services, and only 1-2% came from
outside the country.
11
Airfreight & Surface Transportation

Widely Varying Top-Line Exposure to the Euro, But Profit Exposure Is More Limited
Thomas Wadewitz AC We believe that while the Freight Transports have varying degrees of top-line
(1-212) 622-6461 exposure to the euro, profit exposure is more limited. Those companies with euro-
thomas.r.wadewitz@jpmorgan.com denominated revenue exposure within our coverage universe are UTIW ($14.85),
Alexander Johnson EXPD ($38.63), UPS ($63.93), and FDX ($83.14), with approximately 29%, 17%,
(1-212) 622-6461 11%, and 5% exposure, respectively. For UTIW we base this on net revenue in
alexander.k.johnson@jpmorgan.com UTIW’s Europe, Middle East, and North Africa geographic segment, while for
Michael Weinz, CFA EXPD we base this on net revenue in the geographic segment that EXPD defines as
(1-212) 622-6383 Europe and Africa.
michael.r.weinz@jpmorgan.com
J.P. Morgan Securities Inc. The reason the profit exposure is more limited, in our view, is that the companies in
our coverage: (1) do a limited amount of business in Europe as a percentage of their
Company Name Ticker Rec total book of business (e.g., UPS, FDX, EXPD, and UTIW do a meaningful amount
Arkansas Best ABFS UW
C.H. Robinson Worldwide CHRW OW of business in Europe on an absolute basis but as a percentage the total exposure is
Canadian National Railway CNI OW more modest); (2) also have a meaningful portion of the expenses associated with
Canadian Pacific Railway CP N
Con-way CNW N euro-denominated revenue in the same currency; and/or (3) do some amount of
CSX CSX OW hedging of the translation risk (note: UPS does hedge). Thus, the risk is mitigated
Expeditors EXPD N
FedEx Corp FDX OW somewhat in that it is driven more from a macro/demand perspective than from a
Genesee & Wyoming GWR N translation perspective. As one example, in our view a $0.10 appreciation in the
Heartland Express HTLD N
J.B. Hunt Transport Services JBHT OW average US$/euro exchange rate for a full year has historically amounted to about
Knight Transportation, Inc. KNX OW $0.10 benefit for UPS. At the same time we note that our 2010E EPS for UPS is
Landstar LSTR OW
Norfolk Southern NSC N $3.30, so the magnitude of the exchange rate impact is small relative to total EPS, in
Old Dominion ODFL N our view, and the same would broadly be true for FDX, EXPD, and UTIW for the
Pacer International PACR N
RailAmerica RA OW reasons we described above.
Union Pacific UNP OW
United Parcel Service UPS OW In our view, many freight transports within our coverage – namely the US domestic-
UTi Worldwide UTIW N
Werner Enterprises WERN OW based trucking companies (i.e., ABFS ($27.13), CNW ($34.57), ODFL ($34.11),
YRC Worldwide YRCW N YRCW ($0.46), HTLD ($15.58), JBHT ($34.04), KNX ($19.90), and WERN
($20.93)) and the railroads (i.e., CNI ($55.68), CP ($53.93), CSX ($52.67), GWR
($34.88), NSC ($55.22), RA ($11.83), and UNP ($71.07)) – have virtually no
exposure to the euro other than from a very broad global macro demand perspective,
while others (i.e., CHRW ($57.83) and LSTR ($42.24)) have limited exposure.
MOST EXPOSURE: UTi Worldwide (UTIW, $14.85, N – TP $15)

Within our coverage, we believe that UTIW has the greatest percentage of its
revenue denominated in euros at slightly less than about 29% of total net revenue.
Our view is that the exposure is slightly less than 29% because we calculate this
figure based on UTIW’s Europe, Middle East, and North Africa geographic segment.
Still, we believe a large component of this total is in Europe. As an aside, we note
that UTIW also has meaningful exposure to South Africa’s rand with about 22% of
net revenue denominated in that currency, in our view.
LEAST EXPOSURE: Union Pacific (UNP, $71.07, OW – TP $85)

UNP does not do any direct business in Europe and most of its export-related
business is driven by Asia, not Europe. UNP is one of our top picks in Transport with
a strong volume and cost-side story and the potential for accelerating pricing gains
through 2010.
12
Electrical Equipment & Multi-Industry

EE/MI Has Broad Exposure to EU
C. Stephen Tusa, Jr. CFA AC The EE/MI sector is broadly exposed to trends across the globe, be it Europe or
(1-212) 622-6623 ROW, as our companies, on average, have 55% NA, 25% EMEA, and 20% ROW
stephen.x.tusa@jpmorgan.com exposures. From a pure percentage-of-revenue perspective, within the large cap
Phil Gresh, CFA space, the companies with the largest European exposure are DHR ($79.81, OW),
(1-212) 622-4861 HON ($43.52, N), and TYC ($36.66, N). Within the mid-caps, ST ($18.24, OW) and
phil.m.gresh@jpmorgan.com WBC ($30.83, OW) have the highest exposure. Keep in mind that EU-driven risk
Drew Pierson aversion and a stronger USD have implications beyond just financial translation and
(1-212) 622-6627 demand in the end market there – declining commodity prices are a broad negative as
drew.a.pierson@jpmorgan.com
a global demand driver (issue for DOV ($48.03, N), EMR ($48.47), ROK ($56.54,
J.P. Morgan Securities Inc. OW)), EU-based competitors become more competitive (issue for GE ($16.88, OW),
Company Name Ticker Rec
EMR, ROK), while some items priced in USD become more expensive (issue for
3M MMM N TXT ($20.38, N) and bizjets), tangential impacts that must be kept in mind.
Danaher DHR OW
Dover DOV N
Emerson Electric Co. EMR RS
Most Exposure
Generac GNRC N
General Electric Co. GE OW The company with the highest exposure to Europe in our group is WBC ($30.83,
Honeywell HON N OW – TP $41), at 75% of sales in Europe. However, the currency translation factor
Hubbell Inc. HUBB OW
Ingersoll Rand IR OW
on EPS is actually fairly minimal. On its recent conference call, the company said a
ITT Corp. ITT N 10% swing in the euro would only swing EPS by a few pennies. Outside of WBC,
Lennox International LII OW
Rockwell Automation ROK OW
the large cap companies with the highest exposure to the euro in our group are DHR
Roper Industries ROP N (mainly financial), HON (demand issues, mostly European auto), and TYC, at ~30%
Sensata ST OW
SPX Corp. SPW OW
exposure. ITT ($49.99, N) overall only has 20% exposure, but its commercial
Textron TXT N businesses are closer to 40%, while Defense is minimal. Beyond that, the rest of our
Tyco International TYC N
WABCO WBC OW
group is generally 20-25% exposed, with GE (35% of assets at GECS are Europe-
Watsco WSO OW based, while CTA at GE Capital declines with euro), IR ($35.24, OW), MMM
Watts Water Technologies WTS N
Wesco WCC OW
($82.63, N), and SPW ($62.68, OW) at 25%.
Least Exposure
The least-exposed companies in our group are those that are primarily US-based,
mostly in the mid-cap arena, where we have a few companies that have nearly 100%
North American sales. These would include: GNRC ($13.52, N), HUBB ($43.12,
OW), WCC ($36.12, OW), and WSO ($54.65, OW).
13
Engineering & Construction

Eurozone Exposure Modest to Immaterial at Most E&Cs, Mitigated by Hedges
Scott Levine AC Many E&C companies operate in the Eurozone, a mature market for engineering
(1-212) 622-5609 services and major construction with a stable political and economic backdrop.
scott.j.levine@jpmorgan.com However, exposure to the currency as a portion of the overall business is typically
Rodney C. Clayton, CFA modest for most E&Cs (less than 10% of revenue and backlog), driven by global
(1-212) 622-2873 diversity in their business portfolios, as demand from other regions (including North
rodney.c.clayton@jpmorgan.com America, Latin America, the Middle East, and Asia-Pacific) is usually significant.
Hedging strategies vary and are most prevalent at companies with a greater portion
Company Name Ticker Rec of revenue derived outside of North America. Companies use hedges to limit risk
Environmental Services
Casella Waste Systems Inc. CWST N during the procurement process, particularly for turnkey lump-sum projects where
IESI-BFC, Ltd. BIN RS the contractor bears risk on cost escalation. We also note that E&C companies
Republic Services Inc RSG OW
Stericycle Inc. SRCL N mitigate risk on construction projects by matching currencies on revenues and costs
Waste Connections WCN OW as closely as possible. Higher-margin engineering contracts are more likely to be
Waste Management WM N
Waste Services, Inc. WSII RS written in US dollars, as these projects are generally more technology-based and
therefore less susceptible to currency fluctuation on a cost basis. All companies bear
Chicago Bridge & Iron Co. NV CBI OW translation risk, and this can most notably be seen via changes in backlog between
EnergySolutions ES N quarters.
Fluor Corp FLR N
Jacobs Engineering JEC OW
Mistras Group MG OW MOST EXPOSURE:
Pike Electric PIKE N
Quanta Services, Inc. PWR OW Jacobs Engineering (JEC, $42.35, OW – TP $54)
The Shaw Group, Inc SHAW N
URS Corporation URS OW Fluor (FLR, $45.95, N – TP $57)
The two largest E&Cs in our coverage group – JEC and FLR – have a higher portion
of euro-denominated revenue and backlog than most E&Cs. That said, we estimate
both companies’ European exposure to be fairly modest (only 5-10%). Each
company maintains a hedging program designed to mitigate the impact of currency
fluctuations on its business. Large projects (whether starting or completing) can alter
the mix over a multi-year period.
LEAST EXPOSURE:
Quanta Services (PWR, $19.67, OW – TP $25)

URS (URS, $46.78, OW – TP $59)
Pike Electric (PIKE, $10.00, N – TP $10.50)
The Shaw Group (SHAW, $33.98, N – TP $39)
EnergySolutions (ES, $6.61, N – TP $7.50)
We estimate several stocks in our coverage group have immaterial exposure (less
than 1% of revenue and backlog) to the euro, including PWR, URS, PIKE, SHAW,
and ES. PWR and PIKE have little or no business outside the US. The ~60% of
revenue ES derives outside the US is denominated in British pounds by way of the
company’s contract with the UK government for the operation and decommissioning
of the Magnox reactors.
14
North American-Based Footprints Limit Eurozone Exposure
Scott Levine AC Most waste companies operate exclusively in North America, limiting major
(1-212) 622-5609 currency exposure to the US dollar and the Canadian dollar. Therefore, we don’t
scott.j.levine@jpmorgan.com consider Eurozone exposure a meaningful risk to the outlook for our waste coverage
Rodney C. Clayton, CFA group at this time.
(1-212) 622-2873
rodney.c.clayton@jpmorgan.com MOST EXPOSURE: Stericycle (SRCL, $55.53, N – TP $61)
LEAST EXPOSURE: All Others (No Meaningful Exposure)
While Stericycle derived 14% of its revenues from European countries in 2009, we
Casella Waste Systems Inc. CWST N believe the majority of its exposure is to the British pound sterling. We estimate that
IESI-BFC, Ltd. BIN RS less than 5% of revenues are euro-denominated, and SRCL does not hedge this
Republic Services Inc RSG OW
Stericycle Inc. SRCL N exposure.
Waste Connections WCN OW
Waste Management WM N
Waste Services, Inc. WSII RS

Chicago Bridge & Iron Co. NV CBI OW
EnergySolutions ES N
Fluor Corp FLR N
Jacobs Engineering JEC OW
Mistras Group MG OW
Pike Electric PIKE N
Quanta Services, Inc. PWR OW
The Shaw Group, Inc SHAW N
URS Corporation URS OW
15
Machinery
Competitive Environment Could Pose a Risk
Ann Duignan AC While most of our companies under coverage have exposure to Europe, we believe
(1-212) 622-0381 that the greatest potential threat to the group lies in the growing competitive
ann.duignan@jpmorgan.com advantage that European machinery companies may have as a result of the decline in
Ingrid Aja, CFA the euro. Companies in our coverage universe have formidable European competitors
(1-212) 622-3730 who could take advantage of a weak euro to enhance their market share positions in
ingrid.c.aja@jpmchase.com developing regions of the world. Examples include ETN ($70.25, N) (European
Greg Williams, CFA competitors Schneider Electric and Sauer-Danfoss) and PH ($62.25, N) (Sauer-
(1-212) 622-3549 Danfoss and Bosch Rexroth AG) as well as MTW ($12.39, N) (Liebherr), CAT
gregory.b.williams@jpmchase.com
($62.10, OW) (JCB and Liebherr), and CMI ($65.31, N) (MTU and Wartsila). As a
J.P. Morgan Securities Inc. result, we could see mounting pricing pressure for US companies just as input costs
are rising and ultimately US machinery stocks may deliver disappointing incremental
Actuant Corp ATU N profits.
AGCO Corp. AGCO N
Bucyrus International BUCY N Exposure to Europe (usually reported as EAME) varies for US machinery stocks
Caterpillar Inc. CAT OW
CNH Global CNH N from 0% (NAV) to 57% (AGCO). On average, our companies generate about 29% of
Commercial Vehicle Group CVGI OW their revenues in the region. Most companies manufacture in the region and compete
Cummins Inc CMI N
Deere & Co. DE OW directly with European and Asian competitors who also manufacture in the region.
Eaton Corp. ETN N However, there are some outliers. For example, AGCO generates 57% of its
Illinois Tool Works ITW OW
Joy Global JOYG N revenues in the region and 67% of its EBIT. It also exports equipment from Europe
Kennametal Inc. KMT OW to the US. When the euro falls, the company posts lower profits in the region and higher
Manitowoc Co. MTW N
Modine Manufacturing MOD OW profits in the US. Its competitor Deere (DE, $56.38, OW) generates 27% of its
Company revenues in EAME and 48% of its revenues in NA. In our view, Deere represents a
Navistar Int'l NAV N
Oshkosh Corp. OSK UW better hedge in this environment as US agriculture is holding up well, despite the
PACCAR Inc. PCAR OW stronger dollar. However, Deere is not completely immune as it exports large HP
Parker Hannifin PH N
Terex Corp TEX N tractors and combines from the US, particularly to Eastern Europe. Its European-
based competitors such as Claas may be in a better position to gain share in Eastern
Europe when that market recovers. On the other hand, NAV has no exposure to
Europe and while it does have other company-specific risks, it is the obvious hedge
against a falling euro. Having said that, its competitor PCAR ($41.58, OW)
generates 35% of its revenues in Europe and it imports engines from the region. A
falling euro may make its engines more competitive in the US market.
MOST EXPOSURE: AGCO (AG, $32.96, N – TP $39)

Europe remains a key source of risk for AGCO with ~57% of its revenues and ~67%
of its operating income derived in EAME in 2009. AGCO is trading at 19.6x our
2010 EPS estimate of $1.68. Historically, AGCO has traded at a “trough” forward
P/E multiple of around 10x “peak” earnings, and a “peak” P/E multiple of 20-25x on
“trough” earnings. We believe investors are looking beyond the 2010 trough and into
the earnings potential during the cyclical recovery. Our $39 price target represents a
close to mid-cycle multiple of 17x on our 2011 EPS estimate of $2.50, discounted
back to year-end 2010.
LEAST EXPOSURE: Navistar (NAV, $46.67, N – TP $48)

NAV has no exposure to Europe and as such represents the best hedge in our group.
However, the company does have significant company-specific risk including
potential market share losses in the US truck market. Historically, NAV has traded
between a “peak” forward P/E multiple of 20-25x on “trough” earnings and a
“trough” forward P/E multiple of 5-6x on “peak” earnings. Our YE 2010 price target
of $48 reflects a multiple of 18x on our F2011 EPS estimate of $2.95, discounted
back to year-end 2010.
16
Apparel/Textile Manufacturers
Consumer
Both Wholesale and Direct Retail Exposure
Christopher Kim AC Apparel manufacturers have relatively large exposure to the European market
(1-212) 622-6482 through both wholesale and direct retail exposure. The group is impacted on many
chris.kim@jpmorgan.com levels including the translation of results back to USD, transactional impacts from
Brian Tunick inventory purchases, as well as store-level payroll. By company we estimate
(1-212) 622-6449 European exposure as a percentage of sales at: PVH ($54.80) 30% (including
brian.tunick@jpmorgan.com Tommy Hilfiger), WRC ($41.39) 22%, RL ($82.74) 20%, VFC ($78.89) 20%, and
J.P. Morgan Securities Inc. JNY ($18.88) <5%.
Charming Shoppes CHRS N
MOST EXPOSURE: Warnaco (WRC, $41.39, N – TP $54)
Christopher & Banks Corp. CBK N
Coldwater Creek Inc. CWTR N
Warnaco’s exposure to the European market is primarily through its license of the
Jones Apparel Group JNY UW Calvin Klein brand including underwear, sportswear, and accessories. We estimate
Phillips-Van Heusen PVH OW
Polo Ralph Lauren RL N
that about 22% of the company’s annual sales stem from the European market and
The Dress Barn, Inc. DBRN N the region is a critical growth venue with 30% of its projected 20%+ square footage
The Warnaco Group, Inc. WRC N
VF Corp. VFC N
growth allocated to this market.
The company is not immune to dramatic shifts in currency which accounted for an
$85 million adverse impact to the top line and a $40.5 million adverse impact to
operating income in 2009. The company does utilize active hedging (we estimate
~50% of its exposure to the euro six months out), transactional hedges, and more
recently euro-denominated purchases of inventory to help minimize volatility as a
result of currency fluctuations.
At current levels we anticipate the euro to be a headwind for the company from a
top-line perspective, but this will be offset by a benefit on the SG&A line as a result
of the strengthening US dollar. Given the evolving nature of the hedges and impact
below the top line, it is difficult to triangulate the direct impact to the bottom line.
However, at current levels, we expect to see a 1-2% adverse impact to top-line results
for F10 as a result of the weakening euro. However, the company’s exposure to other
currencies such as the Korean won and Canadian dollar (which are stronger y/y
against the USD) will continue to benefit results, helping to offset the weakness in
the euro. In fact, the strengthening KRW and CAD should continue to lead to a net
benefit to sales and operating income in the 2Q 2010, but a net detriment to the 3Q
and 4Q. For the full year, we expect to see minimal adverse impact barring continued
weakness in the euro or a sudden deceleration in European discretionary
consumption.
LEAST EXPOSURE: Jones Apparel Group (JNY, $18.88, UW – TP $22)

The company’s exposure to the euro is limited to licensed categories within the JNY
portfolio including Nine West and Anne Klein. As such, we see minimal impact to
the company’s financial outlook in the foreseeable future. However, we expect the
company to begin increasing its focus on global growth over the next few years,
making it more exposed to currency fluctuations in the future.
17
Autos & Auto Parts

Lots of FX Translation Risk Here, But Negligible FX Transaction Risk
Himanshu Patel AC Most US automotive stocks are heavily exposed to the Euro zone.
(1-212) 622-3906
himanshu.patel@jpmorgan.com The average supplier across our space derives nearly 40% of its revenues from
Ryan Brinkman Europe. At the high end of this range are ALV ($47.51, OW), TRW ($30.08, OW),
(1-212) 622-4137 and BWA ($37.09, OW) with about 50-60% pan-Europe revenue exposure each.
ryan.brinkman@jpmorgan.com HAR ($38.77, OW) also derives an outsized portion of its revenues from Europe
J.P. Morgan Securities Inc. (and Germany in particular) and so would suffer from a currency translation effect on
Europe-derived income yet many of these vehicles are destined for the United States,
Company Name Ticker Rec in which case German automakers (HAR’s key customers) could find themselves in a
American Axle AXL N
ArvinMeritor, Inc. ARM N more advantageous pricing environment should the euro decline further.
Autoliv ALV OW
AutoNation, Inc. AN N Auto suppliers generally follow the rule of “build where you sell,” because that is
Avis Budget Group, Inc. CAR OW
Borg Warner Inc. BWA OW what automakers do (suppliers often will locate their facilities just miles from the
CarMax Inc. KMX N final assembly plant they supply). Therefore, transactional currency exposure to the
Cooper Tire & Rubber CTB OW
Dana Holding Corporation DAN OW euro (e.g., a currency mismatch between costs and revenues) is very small across
Dollar Thrifty Automotive DTG RS among US auto stocks (though can be meaningful for German, Korean, and Japanese
Ford Motor Company F N
Gentex Corporation GNTX N OEMs). Translational currency exposure to the euro, however, is high.
Genuine Parts Company GPC N
Goodyear Tire & Rubber GT OW Calculating FX translation hit for a US auto supplier is fairly straightforward. For
Group 1 Automotive, Inc GPI OW
Harley-Davidson HOG N example, if a company derives 50% of its revenues from the Euro zone and its
Harman International HAR OW European margins are comparable to its global EBIT margin, then a 10% weakening
Hertz Global Holdings, Inc. HTZ RS
Johnson Controls, Inc. JCI N in the euro against the dollar results in a 5% decline in that company’s global EBIT
KAR Auction Services, Inc. KAR OW (and probably a slightly greater portion of EPS, as interest expense tends to be more
Lear Corporation LEA OW
Magna International, Inc. MGA OW US-skewed).
Penske Automotive Group, Inc. PAG OW
Sonic Automotive, Inc. SAH OW Several auto stocks we cover have limited Europe exposure. Chief among these are
Tenneco Automotive TEN OW
TRW Automotive TRW OW auto retail stocks SAH ($10.02, OW), AN ($19.03, N) (no Europe exposure), and
GPI ($26.81, OW) (less than 5%). PAG ($13.31, OW), another retailer, does have
material (~35%) exposure to Europe (though mainly in the UK). CTB ($19.13, OW)
and DAN ($11.43, OW) also have relatively low Europe exposure vs. peers. Among
traditional auto parts suppliers, AXL ($8.85, N) (less than 5%) has the least
exposure. Many, however, are highly exposed. In addition to the aforementioned
ALV/TRW/BWA (50-60% each), LEA ($72.50, OW) and ARM ($14.03, N) also
have high exposure (~45% each) as well as TEN ($21.34, OW), MGA ($69.13, OW),
and GNTX ($19.79, N) (~40% each). While MGA has ~40% revenue exposure, its
Europe division reports breakeven EBIT margins currently, eliminating any near-
term FX translation hit to existing estimates. GNTX is the one company that does
export in large quantities from the US abroad. However, in the case of GNTX, nearly
all of its contracts are negotiated in dollars, not euros, limiting its exposure.
MOST EXPOSURE: TRW Automotive (TRW, 30.08, OW – TP $44)

LEAST EXPOSURE: American Axle (AXL, $8.85, N – TP $11)
18
Beverages
CCE and DPS at Opposite Ends of the Spectrum
John Faucher AC Within our US Beverage universe estimated exposure to the euro ranges from 55% to
(1-212) 622-6443 none, with many of the companies having decent-sized international exposure. With
john.faucher@jpmorgan.com the exception of Coca-Cola Hellenic (HLBr.AT, €17.50, UW), all of our companies
Neal Rudowitz are US-based and report in US dollars. With the exception of Coca-Cola (which
(1-212) 622-0094 hedges some of its operating profit), companies generally do not enter into contracts
neal.m.rudowitz@jpmorgan.com to hedge currency exposure, but do tend to use other methods to offset transactional
Sofya Tsinis risk (currency risk associated with dollar-denominated costs occurring in areas of
(1-212) 622-6391 business outside the US), including issuing debt in local currencies in areas of
sofya.tsinis@jpmorgan.com
business outside the US. In Coca-Cola’s case, the company tends to hedge
Peter Grom translational risk only on some major currencies (yen, euro, pound) as hedging
(1-212) 622-4876 smaller currencies is generally cost-prohibitive.
peter.grom@jpmorgan.com
J.P. Morgan Securities Inc. Our most exposed company to the euro is Coca-Cola Enterprises (CCE, $25.84, N).
The company is in the process of closing a deal with Coca-Cola (KO, $52.67, N) to
Company Name Ticker Rec sell its NA operations, putting its sales exposure to Europe at 100%, which includes
Coca-Cola Co. KO N
Coca-Cola Enterprises CCE N 55% euro, 35% pound, and 10% combination of Swedish krona and Norwegian
Coca-Cola Hellenic Bottling HLBr.AT UW kroner. The stock is trading on the anticipation that the deal goes through (scheduled
Dr Pepper Snapple Group DPS N
Hansen Natural Corp. HANS N to close in October). Currently, CCE’s sales exposure to the euro is about 18%, with
Molson Coors Brewing TAP OW closer to 25-30% euro exposure on operating income.
PepsiCo PEP OW
We would expect continued weakness in the euro to weigh on the stock; however,
CCE currently may be being unfairly punished by the euro weakness. CCE is
currently trading close to $26.00, which includes a $10 dividend that will be paid to
shareholders once the deal with KO closes. Given that the $10 doesn’t change
regardless of FX and EPS movements, the actual delta to the impact of the stock
should be based off of the stub (approximately $16) and therefore is a smaller
percentage when compared to the full stock price. In other words (to provide a purely
hypothetical example), a 10% move in FX should be based off of a $16 stub and
should be $1.60 (not $2.60) and therefore only translate to a 6% change in stock
price.
Our least exposed stock is Dr Pepper Snapple Group (DPS, $35.72, N). The company
has 0% exposure to Europe. Ironically, a lack of international presence (about 7%
int’l exposure including Mexico and Canada) was a detriment after the company
went public in May 2008. Conversely, DPS is now benefiting from having 93% of
sales in the US with better fundamentals coming from flavored CSDs. While DPS
should benefit from a payout from Coca-Cola (to continue distributing their brands
post acquiring CCE’s NA territory – similar to PEP), we think the company is fairly
valued.
MOST EXPOSURE: Coca-Cola Enterprises (CCE, $25.84, N – TP $23)

LEAST EXPOSURE: Dr Pepper Snapple (DPS, $35.72, N – TP $37)
19
Broadlines & Food Retailing

Modest Exposure for Broadlines & Food Universe
Charles Grom, CFA, CPA AC In our Broadlines & Food Retailing universe, Wal-Mart, Whole Foods, Saks, and
(1-212) 622-6527 Costco have the only FX exposure.
charles.grom@jpmorgan.com
Paul Trussell, CFA Wal-Mart: International revenues represented roughly 25% of total company
(1-212) 622-5671 revenue in 2009. ASDA, Wal-Mart’s UK subsidiary, had net revenues of
paul.e.trussell@jpmchase.com $31.2 billion in the most recent fiscal year, representing ~8% of total company
Aaron Stein revenue. To hedge the exchange rate component of its investments in the UK,
(1-212) 622-6654 Wal-Mart holds currency swaps (FV $475 million as of 1/31/10). On sensitivity, an
aaron.d.stein@jpmorgan.com increase or decrease of 10% in the underlying exchange rate would result in the loss
Radina L Russell of $11 million or $30 million, respectively, on the value of the swaps. Additionally,
(1-212) 622-8738 WMT has roughly £3.0 billion of designated debt (1/31/10) as a hedge and a +/- 10%
radina.l.russell@jpmorgan.com change in value of the US dollar relative to the British pound would result in a gain
J.P. Morgan Securities Inc. or loss of $440 million.
Company Name Ticker Rec Saks: The company purchases a substantial portion (> 50%) of its inventory from
Big Lots, Inc. BIG OW European suppliers. As such, a fluctuation in the Euro/US dollar exchange rate has a
BJ's Wholesale Club BJ N
Costco Wholesale Corporation COST OW large impact on the business. However, SKS does not use any hedging to mitigate the
Dollar General DG N FX impact.
Dollar Tree, Inc. DLTR N
Family Dollar Stores, Inc. FDO N
JCPenney Corporation JCP OW Whole Foods: International revenues (Canada and UK) represent roughly 2.8% of
Kohl's Corporation KSS OW total company revenue. The company owns and operates six stores in Canada and
Kroger Co. KR OW
Macy's Inc. M OW five stores in the UK and uses the local currency as the functional currency. Whole
Nordstrom, Inc. JWN N Foods does not currently hedge against the risk of exchange rate fluctuations.
Ruddick Corporation RDK N
Safeway SWY N
Saks, Inc. SKS OW Costco: For Costco, International revenues (Canada, UK, Japan, Korea, Taiwan,
SuperValu, Inc. SVU N Australia) represented ~20% of sales in the most recent fiscal year. In the UK
Target Corporation TGT OW
Vitamin Shoppe, Inc VSI OW specifically, the company operates 21 membership warehouses. Given that Costco’s
Wal-Mart Stores, Inc. WMT OW foreign subsidiaries conduct limited transactions in their non-functional currencies,
Whole Foods WFMI OW
the company uses forward exchange contracts (notional amount of $183 million as of
8/30/09) primarily to hedge US dollar merchandise inventory expenditures. On
sensitivity, a +10% change in the functional currency would have decreased the FV
of the contracts by $18 million as of 8/30/09.
MOST EXPOSURE:
Wal-Mart (WMT, $52.40, OW – TP $58)

Whole Foods (WFMI, $36.68, OW – TP $43)
Saks (SKS, $8.55, OW – TP $11)
Costco (COST, $57.31, OW – TP $64)
LEAST EXPOSURE:
Remainder of the Group
20
Gaming & Lodging

Impact of FX
Joseph Greff AC The impact of FX volatility is more of a consideration/issue for lodging investors
(1-212) 622-0548 than for gaming investors. Of the global lodging companies, international
joseph.greff@jpmorgan.com performance has helped overall global performance – both on the demand side,
Kevin Milota where trends have been encouraging, but also on currency, where, for example, US
(1-212) 622-0987 dollar-translated European hotel Revenue Per Available Room growth was favorably
kevin.milota@jpmorgan.com aided by some 700 basis points in the 1Q10 alone. Starwood is the lodging company
Carlo Santarelli that has the most exposure to the euro (and FX swings in general), given that over
(1-212) 622-1305 half of its non-timeshare profits are derived from outside North America. That said,
carlo.santarelli@jpmorgan.com
we believe current buy-side expectations, sell-side estimates, and guidance take into
Daniel Yoon account the impact of FX. HOT does not engage in any euro-specific hedging but,
(1-212) 622-1205 rather, relies on a diversified portfolio to mitigate swings in one specific currency.
danile.yoon@jpmorgan.com
J.P. Morgan Securities Inc. Who is the least exposed? Small-cap regional casino operator Pinnacle
Entertainment. Why? 100% of its operations are domestic with little to no
Company Name Ticker Rec dependence on foreign arrivals for revenues.
Ameristar Casinos, Inc. ASCA N
Bally Technologies, Inc. BYI OW
Boyd Gaming Group BYD UW
Choice Hotels International CHH UW
Hasbro, Inc. HAS N
Host Hotels & Resorts Inc. HST N
MOST EXPOSURE: Starwood (HOT, $46.99, OW – TP $64)
Hyatt Hotels Corporation H OW
International Game Technology IGT OW LEAST EXPOSURE: Pinnacle Entertainment (PNK, $12.74, OW – TP $17)
Las Vegas Sands Corp. LVS OW
LaSalle Hotel Properties LHO N
Marriott International MAR OW
Mattel, Inc. MAT N
MGM Mirage MGM OW
Orient-Express Hotels OEH N
Penn National PENN OW
Pinnacle Entertainment PNK OW
Shuffle Master SHFL N
Starwood Hotels & Resorts HOT OW
Sunstone Hotel Investors Inc. SHO OW
WMS Industries WMS OW
Wyndham Worldwide WYN OW
Wynn Resorts WYNN N
21
Hardlines Retailing
Framing Currency Exposure
Christopher Horvers, CFA AC Given the current events in Europe, below we frame out the regional exposure for
(1-212) 622-1316 our stocks under coverage. BBY, ODP, OMX, and SPLS have the most international
christopher.horvers@jpmorgan.com exposure in our coverage universe (with OMX having no European operations).
Aaron Goldstein
(1-212) 622-1336 For the rest of our names, excluding Canada and Mexico operations and some effects
aaron.goldstein@jpmorgan.com on sourcing costs (e.g., Asia for all names and Europe for WSM), foreign currency
Jeff Wimmer exposure is generally minimal.
(1-212) 622-6587
jeffrey.d.wimmer @jpmorgan.com
Best Buy (BBY, $41.03, N – TP $48)
J.P. Morgan Securities Inc. For BBY, the company has significant currency exposure with 25% of total sales
outside of the US. By magnitude, the company has an estimated 12.5% exposure to
Advance Auto Parts, Inc. AAP N
Canada followed by 7.5% and 5.0% of total sales in Europe and the UK,
AutoZone, Inc. AZO N respectively. Merchandise and operating costs are largely matched to the local
Bed Bath & Beyond BBBY N
Best Buy BBY N
currency (less so in Canada).
Cabela's Inc. CAB UW
Dick's Sporting Goods DKS OW Staples (SPLS, $21.66, OW – TP $28)
Hibbett Sports, Inc. HIBB N
Lowe's Companies, Inc. LOW OW SPLS has 22% of its sales generated abroad (plus another 10-15% for Canada). Euro-
O'Reilly Automotive ORLY N
Office Depot ODP OW countries represent an estimated ~13% of its entire sales followed by Australia, UK,
OfficeMax Inc. OMX OW and emerging markets (combining for ~10% of total sales). Separately, Canada
PetSmart, Inc. PETM N
RadioShack RSH N represents an estimated low-teens mix of total company sales and for most regions
Staples SPLS OW costs are largely matched to the local currency revenues. For example, in 4Q,
The Home Depot HD OW
Tractor Supply TSCO N currency aided International sales by ~$100 million, but the bottom-line effect was
Williams-Sonoma, Inc. WSM N only $6 million. Canada had a similar revenue impact but larger bottom-line impact.
Office Depot (ODP, $6.18, OW – TP $9)

ODP also has a sizable foreign currency exposure, representing almost 30% of its
entire sales base (excluding Canada). The UK and Europe represent an estimated
13% and 10% of total sales, respectively. As a reference, in its 10-K, ODP states that
a 10% change in the applicable foreign exchange rates would result in an increase or
decrease in operating profit of ~$12 million. Since the end of 1Q and through
yesterday, FX rates have changed ~5% for ODP, representing $0.01-0.02 of
estimated EPS headwind.
OfficeMax (OMX, $16.62, OW – TP $22)

While OMX has no European exposure, an estimated ~7% of total sales are from
Canada while Australia and New Zealand each represent ~4% of total sales. Again,
outside of Canada, costs are largely matched to the revenues on a currency basis.
22
Homebuilding & Building Products

SWK Features Largest Exposure to Euro; USG Least
Michael Rehaut, CFA AC While the homebuilders have zero exposure to foreign currency, our building
(1-212) 622-6696 products universe has an average 18% exposure to Europe (as a percentage of 2009
michael.rehaut@jpmorgan.com revenues), ranging from roughly 5% at USG ($19.56, N) to roughly 25% at SWK
Ray Huang, CFA ($56.12, N). In addition, we note exposure for the other companies in our building
(1-212) 622-0547 products universe include WHR ($98.14, N) at 21%, MAS ($13.66, UW) at 19%,
ray.huang@jpmorgan.com and OC ($32.51, OW) and MHK ($55.02, OW) both at 17%. While most companies
Jason A Marcus utilize some form of hedging to mitigate foreign currency volatility, we note sales
(1-212) 622-4906 and margins are still susceptible to material fluctuations in currency.
jason.a.marcus@jpmorgan.com
J.P. Morgan Securities Inc. MOST EXPOSURE: Stanley Black & Decker (SWK, $56.12, N – TP $65)
Company Name Ticker Rec Stanley Black & Decker has a roughly 25% exposure to Europe, the largest in our
Beacon Roofing Supply BECN N building products universe, with exposure across all three of its segments.
Beazer Homes BZH UW
D.R. Horton DHI N Specifically, in 1Q10, its consolidated sales benefited by 4% due to favorable
Fortune Brands FO N currency, including its Construction & DIY segment benefiting by 5%, its Industrial
Hovnanian Enterprises HOV N
KB Home KBH OW segment benefiting by 3%, and its Security segment also benefiting by 3%. During
Lennar LEN OW its last conference call on April 27th, SWK noted that it expected currency impacts
Masco Corp. MAS UW
MDC Holdings MDC UW
(ex-Chinese RMB) to be minimal for the full year, which would imply some negative
Mohawk Industries MHK OW headwinds from 2Q through 4Q, given 1Q’s benefit. Regarding hedging, SWK notes
Owens Corning OC OW
PGT, Inc. PGTI OW
that it utilizes risk management tools to mitigate potential market fluctuations in
PulteGroup Inc. PHM N foreign currencies, but that there can be no assurance that such measures will result
Ryland Group RYL N
Standard Pacific SPF UW
in all market fluctuation exposure being eliminated. It also notes that it does not
Stanley Black & Decker SWK N make a practice of hedging its non-US dollar earnings. As a result, if the euro
Toll Brothers TOL OW
USG Corporation USG N
remains weaker than 1.32 $/euro (which we note was the level on April 27th, the date
Whirlpool WHR N of SWK’s most recent guidance), we would expect SWK’s sales to be slightly more
negatively impacted for the remainder of 2010 than expected by the company.
LEAST EXPOSURE: USG (USG, $19.56, N – TP $16.50)

USG Corp. has only a roughly 5% exposure to Europe, the smallest in our building
products universe, with exposure entirely coming from its Worldwide Ceilings
business. In 1Q10, while not quantifying the impact of currency, it did note that
currency was favorable. Given such small foreign currency exposure, we note the
company did not specifically address this issue on its April 20th conference call.
Regarding hedging, USG notes that it uses derivative instruments, such as forward
contracts and cross-currency swaps, from time to time to manage selected foreign
currency exposures. Overall, given that the company has very limited exposure to the
euro, we would not anticipate any material impact from fluctuations in the euro going
forward.
23
Household Products & Personal Care

Few Places to Hide From a Declining Euro
John Faucher AC Companies within our Household Products and Personal Care universe have varying
(1-212) 622-6443 degrees of exposure to foreign currencies (anywhere from 20% to 87%), and no one is
john.faucher@jpmorgan.com completely immune to moves in exchange rates. The euro exposure is much less than
Sofya Tsinis total international exposure, as it ranges from about 1% to roughly 20%. With the
(1-212) 622-6391 recent events unfolding in Europe, particularly Greece, and the concurrent weakening
sofya.s.tsinis@jpmorgan.com in many unrelated currencies, the benefits from a weaker US dollar over the past two
Neal Rudowitz quarters will be short-lived, as it looks like FX will turn into a headwind by CQ310.
(1-212) 622-0094
neal.m.rudowitz@jpmorgan.com HPC companies for the most part do not hedge their FX exposure to top line, but do
Peter Grom enter into other hedging transactions, such as forward contracts, currency swaps,
(1-212) 622-4876 options, etc. In many instances they also carry debt in the local currency and/or
peter.k.grom@jpmorgan.com operate local manufacturing facilities to limit transactional exposure. We do not
J.P. Morgan Securities Inc. expect these practices to insulate the HPC group from the unfavorable FX moves.
Company Name Ticker Rec MOST EXPOSURE: Tupperware (TUP, $43.50, N – TP $58)
Alberto-Culver ACV N
Church & Dwight CHD N Tupperware has the largest international and euro exposure within our coverage
Clorox CLX OW
Colgate-Palmolive CL N universe, as we estimate the company derives about 87% of its sales from foreign
Energizer Holdings ENR OW markets, with about 20-21% coming from the Eurozone (France and Germany are
Estee Lauder EL N
Kimberly-Clark KMB N their largest markets there). Aside from its sizeable exposure to the euro, TUP has
Newell Rubbermaid Inc. NWL OW extensive presence in emerging markets, which accounted for 54% of the company’s
Procter & Gamble PG N
Tupperware Brands TUP N sales in Q1’10.
Since the euro is not the only currency that has weakened significantly as of late, but
many other currencies that TUP is exposed to (i.e., Latin currencies) have also
recently embarked on a similar path, that increases TUP’s earnings risk going
forward, particularly for the back half of the year. While TUP’s stock has been weak
lately, we remain on the sidelines, given potential earnings risk stemming from FX
moves and valuation, which we view as fair, as it is close to its historical average
relative to the peers.
LEAST EXPOSURE: Clorox (CLX, $61.50, OW – TP $67)

Clorox is the most domestic company in our HPC coverage universe, with foreign
operations accounting for about 19-20% of its sales. The company also has the least
exposure to the euro, which we estimate at about 1%. We think that relative to its
peers, the company is well positioned in an environment where the dollar is
strengthening vs. the euro and many other currencies. We also point out that a
stronger dollar should lead to lower input costs, which also bodes well for CLX,
which has a large exposure to commodities (particularly resin). We remain
Overweight on Clorox and view its current valuation as cheap.
24
Packaged Food
A Weak Euro Presents Both Risks and Opportunities in Food
Terry Bivens AC A weaker euro presents both risks and opportunities within our US packaged food
(1-212) 622-0326 space. Earnings for companies that generate meaningful revenue in continental
terry.bivens@jpmorgan.com Europe will come under pressure as sales and revenue are translated back to the US.
Jason English Some, however, produce products or source inputs in Europe that are later sold in a
(1-212) 622-0336 different country or region. These companies may experience a currency transaction
jason.english@jpmorgan.com benefit as their COGS deflate in local currency terms where the end product is sold.
The currency risk is difficult to hedge out over a prolonged period of time. The
Company Name Ticker Rec currency translation risk can be hedged, but any successful gains on this hedge need
Archer Daniels Midland ADM N
Bunge Limited BG N to be marked to market each quarter. Therefore, the forward periods (which stocks
Campbell Soup Company CPB N are valued on) can not be fully insulated. Transactional currency volatility is more
ConAgra Foods CAG N
Dean Foods DF N*
commonly hedged with derivatives, but the hedges are typically of short duration.
General Mills GIS OW
H.J. Heinz Co. HNZ OW
Hain Celestial Group HAIN N
Below we offer our view on which company in our space has the most to lose, and
Hershey HSY N the most to gain from the weak euro.
Kellogg K OW
Kraft Foods KFT OW
Mead Johnson Nutrition MJN N MOST EXPOSURE: Sara Lee (SLE, $13.44)
Sara Lee SLE RS
* Rating as of May 10, 2010. Sara Lee (SLE) has the greatest exposure to the euro among our coverage universe.
After accounting for its pending HBC divestiture, we estimate that 28% of its sales
and 43% of its operating profit is generated in Europe. If current spot rates hold, the
euro will be 8.7% weaker YoY in FY11 (June). This will amount to a 2.4% top-line
headwind next year and be a 3.7% drag on the firm’s operating profit (due to the
higher margin structure in its European coffee business).
Sara Lee has announced its intent to repatriate the majority of its cash to the US over
the next two years. The higher US tax rate, therefore, should be applied to this
operating profit impact when determining the net income and EPS impact. When we
run the calculations, we find that the euro headwind presents a $0.05 (4.6%) risk to
EPS in FY11, based on current spot rates.
LEAST EXPOSURE: Mead Johnson Nutrition (MJN, $48.31, N – TP $50)

Mead Johnson (MJN) is the only company in our coverage universe that could
actually benefit from a weaker euro. Mead Johnson generates roughly 5% of its
revenue in Europe. At current spot rates, the euro will be a 9.7% headwind for sales
and profits generated in the region over the next 12 months. This translates into
roughly a 1% top- and bottom-line headwind for the firm, given its European margin
structure. But this headwind will be more than offset by a transaction benefit.
Mead sources much of the product it sells throughout Asia from its spray drying and
finishing plant in the Netherlands, including nearly all of the inputs for product sold
in China. We estimate that roughly 80% of its Chinese COGS are imported from
Europe. A weak euro (-9.7%), therefore, has the effect of driving down its domestic
COGS by 7.8%. Domestic revenue and SG&A expense, meanwhile, would remain
unchanged in this scenario. This translates into roughly an 11% boost to the
operating profit in China.
At the aggregate firm level, this scenario in China results in a 2.2% boost to
operating profit – more than offsetting the 1% translation headwind from its
European-generated profit. The net 1.2% aggregate operating profit increase
translates into $0.03 (1.4%) growth at the EPS line. And this analysis excludes a
similar benefit that may be realized in Mead’s other Asian markets.
25
Tobacco
Only One International Player
Rae Maile AC Philip Morris International is the world’s largest tobacco company by volumes.
(44-20) 7155 6102- Approximately 40% of its 2010E operating company income comes from the EU,
rae.maile@jpmorgan.com and as it has only a small presence in the UK market, the majority of this is euro-
J.P. Morgan Securities Ltd. denominated exposure. While there is this direct impact from euro translation,
experience from 2009 showed the truth to the management’s comment that the
Altria Group MO OW impact of currency on operating profit is “neither linear, simple, nor consistent
British American Tobacco BATS.L OW across…markets” due to the impact of costs, recharges, and transactional rather than
Imperial Tobacco Group IMT.L N
Lorillard Inc LO UW translational impacts. It is also the case that the dollar has been weak against many
Philip Morris International PM N other currencies, and so while the euro rate is unfavourable, the company increased
Reynolds American RAI OW
Swedish Match SWMA.ST UW its guidance for currency benefit to 2010E earnings at the Q1 stage.
For the three US domestic stocks – MO ($20.76, OW), RAI ($52.17, OW), LO
($76.21, UW) – currency influences are de minimus and perhaps provide, therefore, a
hedge for investors concerned with regard to euro exposure.
MOST EXPOSURE: Philip Morris International (PM, $46.42, N)

LEAST EXPOSURE: Reynolds American (RAI, $52.17, OW)
26
Alternative Energy
Energy
Euro Risk Most Prominent in Solar Stocks
Christopher Blansett AC Within our alternative energy universe, solar stocks have the most direct exposure to
(1-415) 315-6708 the euro given the high leverage to sales in Europe (particularly Germany). In all, we
christopher.r.blansett@jpmorgan.com estimate that Europe has accounted for approximately 80% of global demand for
Brian K Lee solar modules in the past several years and is apt to represent a similar proportion in
(1-415) 315-6710 2010. Among solar companies, hedging strategies are widely varied with companies
brian.k.lee@jpmorgan.com such as First Solar (FSLR, $122.55, UW) being very proactive and aggressive in
J.P. Morgan Securities Inc. minimizing their euro exposure through forward currency hedges while others such
as Evergreen Solar (ESLR, $1.00, N) essentially not putting any hedges in place
Applied Materials, Inc. AMAT OW given liquidity constraints. We note that LED companies such as Cree (CREE,
Ascent Solar Technologies ASTI N $66.46, OW) and Veeco (VECO, $42.78, OW) have relatively little exposure to the
Broadwind Energy BWEN OW
Cree CREE OW euro given a large mix of their sales are centered in the Asia region.
Energy Conversion Devices, Inc. ENER UW
Evergreen Solar ESLR N
First Solar, Inc. FSLR UW
MOST EXPOSURE: Evergreen Solar (ESLR, $1.00, N)
MEMC Electronic Materials Inc. WFR UW
SunPower SPWRA UW
In C1Q10, sales to Europe accounted for 84% of Evergreen’s total sales volume. We
Veeco Instruments VECO OW expect the company to experience a similar regional sales mix through mid-2010
given the ongoing demand pull-in occurring in the German solar PV market ahead of
the July 1 cut to solar PV subsidies (which was passed recently). Given its limited
balance sheet, Evergreen does not have the flexibility to tie up cash to hedge its euro
exposure. Based on company guidance, we estimate that every incremental 4% move
in the euro results in $0.01 impact to EPS.
LEAST EXPOSURE: Veeco Instruments (VECO, $42.78, OW – TP $75)

Veeco’s major customers are in Korea, China, and to a lesser extent Taiwan. We see
minimal exposure to Europe given the large installed base of LED manufacturing
capacity is primarily located in Asia.
27
Electric Utilities & Independent Power Producers

Shelter from the Storm
Andrew Smith AC Electric utilities have no direct FX exposure and, as such, we believe offer ideal
(1-713) 216-7681 investment opportunities for clients looking to shield themselves from FX risk.
andrew.l.smith@jpmorgan.com
Stefka Gerova
Regulated utilities
(1-212) 622-0549 Regulated utilities operate under state and federal rate of return regulation and
Stefka.g.gerova@jpmorgan.com conduct all of their business domestically in USD. Furthermore, regulated utilities
J.P. Morgan Securities Inc. typically pass fuel costs through to customers under rate of return regulation and are
therefore largely unaffected by fluctuations in commodity prices.
AGL Resources AGL N Unregulated power producers
Ameren Corp AEE UW
American Electric Power AEP OW Though there is no direct FX exposure for companies with an unregulated element,
American Water Works AWK N such as FPL Group (FPL, $51.22, OW), Edison International (EIX, $33.03, OW),
CMS Energy Corp CMS OW
Consolidated Edison ED UW and Entergy (ETR, $75.79, OW), there may be some indirect exposure insofar as the
Constellation Energy Group CEG N price of natural gas is a key determinant of an unregulated power business’s
Covanta Holding Corp. CVA OW
Dominion Resources D N profitability. Accordingly, any fluctuations in the price of natural gas resulting from
Duke Energy Corp. DUK N global financial concerns could impact unregulated power producer profitability.
Dynegy, Inc. DYN OW
Edison International EIX OW
Entergy Corp. ETR OW MOST EXPOSURE:
Exelon Corp. EXC N
FPL Group Inc. FPL OW As discussed above, electric utilities and independent power producers do not have
Great Plains Energy GXP N direct FX exposure.
Integrys Energy Group TEG RS
Northeast Utilities NU N
NRG Energy NRG OW LEAST EXPOSURE:
Pepco Holdings POM UW
PG&E Corp. PCG OW PG&E Corp. (PCG, $43.17, OW – TP $57)
Portland General Electric Co. POR N
Progress Energy PGN N
RRI Energy, Inc RRI RS
PG&E Corp. is a pure-play California regulated utility that is actively investing in
Sempra Energy SRE RS infrastructure as well as renewable energy investment opportunities, driving above-
Southern Company SO N
UIL Holdings Corporation UIL N
industry-average annual EPS growth of about 8%. Moreover, the regulatory
Vectren Corp VVC UW mechanisms that the company has in place shield it from demand fluctuations, so it is
Wisconsin Energy Corp WEC N
largely insulated from US economic conditions.
Progress Energy (PGN, $38.83, N – TP $44)

We are currently Neutral on Progress Energy as we believe there may be better
growth prospects elsewhere in our industry. Nevertheless, PGN is a purely regulated
entity that may be attractive for investors who are looking to shield capital and
generate current income. Progress Energy’s regulated business model results in very
little risk to its dividend which represents a current yield of almost 6.5% (versus
about 4.5% for the industry). Moreover, PGN trades at about a 10% discount to the
group (13.1x 2010E P/E versus 14.6x for JPM covered companies) following a
recent negative regulatory outcome in Florida, so we believe downside risk in the
shares may be limited.
28
Asset Managers
Financials
Global Managers Have Most FX Exposure – Domestic Managers Have the Least FX Exposure
Kenneth B. Worthington, CFA AC To lessen the impact of currency movements we would recommend shares of US-
(1-212) 622-6613 focused asset managers over those of global asset managers. US-focused managers
kenneth.b.worthington@jpmorgan.com include Eaton Vance (EV, $31.56, UW), Federated (FII, $23.53, UW), and Pzena
Timothy Shea (PZN, $6.80, N). Global managers include Franklin (BEN, $104.52, OW), Invesco
(1-212) 622-5707 (IVZ, $20.11, OW), and T Rowe (TROW, $52.51, OW). Though domestic in terms
timothy.j.shea@jpmorgan.com of sales, we note that Janus (JNS, $12.11, UW) has significant international fund
J.P. Morgan Securities Inc. AUM and also has significant international exposure in its domestic portfolios. We
also see Och-Ziff (OZM, $16.45, OW) as less exposed to FX as it employs hedging
Eaton Vance Corp EV UW strategies in its funds.
Federated Investors, Inc. FII UW
Franklin Resources
Invesco Ltd.
BEN
IVZ
OW
OW
MOST EXPOSURE: Franklin Resources (BEN, $104.52, OW – TP $135)
Janus Capital Group JNS UW We see Franklin Resources as having the most exposure to FX among asset
Och-Ziff Capital Management OZM OW
Pzena Investment Management PZN N management companies under our coverage. Franklin classifies 28% of its AUM as
T. Rowe Price Group, Inc TROW OW outside of the US based on sales region with 33% of revenues originating outside of
the US. Even within the US, international funds are big sellers, meaning on a firm-
wide basis, about 50% of AUM has international exposure. Europe is Franklin’s
largest international market, followed by Asia and then Canada. Franklin’s top-
selling fund is Global Bond. Though the fund has almost no euro exposure, we still
see headline risk to the fund. We continue to rate the shares Overweight based on
strong sales and performance, though would recommend investors watch currency
closely, especially in relation to the Global Bond fund.
LEAST EXPOSURE: Eaton Vance (EV, $31.56, UW – TP $38)

We see Eaton Vance as having the least exposure to FX among asset management
companies under our coverage. The company is admittedly underexposed to
international markets and there are only a handful of employees outside of the US.
We calculate that about 14% of US mutual fund assets are international-focused and
expect that an even smaller percentage of total company assets are international-
focused. Though we see FX exposure as minimal, we continue to rate the shares
Underweight based on fund performance.
29
Large Cap Banks

Trust Banks to Benefit from Sustained Increase in FX Volatility
Vivek Juneja AC All the trust banks are likely to benefit from increased volatility in the exchange rate
(1-212) 622-6465 due to rising concerns about Greece and other fiscally strapped European countries –
vivek.juneja@jpmorgan.com these include Bank of New York Mellon (BK, $30.06, OW), Northern Trust (NTRS,
Thomas W. Curcuruto $51.80, N), and State Street (STT, $41.34, N). However, State Street should benefit
(1-212) 622-5158 relatively more than its peers because it has a larger business with hedge funds that
thomas.w.curcuruto@jpmorgan.com would participate more in the volatility. FX volatility has surged 20% in G7
Polly P. Sung, CFA currencies and 25% in emerging markets currencies since the end of April, and
(1-212) 622-0551 volumes rose sharply in April and likely rose further last week. In addition, increased
polly.p.sung@jpmorgan.com
nervousness could drive LIBOR rates higher which would improve spreads in
J.P. Morgan Securities Inc. securities lending businesses. However, any related sell-off in the markets would
likely reduce securities lending volumes and also hurt fees in asset management and
Bank of America BAC OW asset servicing businesses.
Bank of New York Mellon Corp. BK OW
BB&T Corporation BBT N The benefit from greater FX volatility and volumes would likely be tempered a little
Citigroup Inc. C OW
Fifth Third Bancorp FITB UW by a stronger dollar as the trust banks derive about 30-50% of total revenue overseas,
Northern Trust NTRS N most of which is from EMEA. The universal banks in our coverage are also exposed
PNC Financial PNC OW
Regions Financial RF N to FX changes but part of this is likely hedged. Citigroup has the largest exposure to
State Street STT N EMEA among the large banks at 20% of Citicorp revenues and 26% of earnings in
SunTrust Banks, Inc. STI N
U.S. Bancorp USB N 1Q10. Bank of America has a much smaller amount of EMEA revenues at about 8%
Wells Fargo WFC OW of total revenues.
The regional banks likely have very little, if any, exposure to FX, particularly in
Europe. However, if the European contagion intensifies further and hurts broader
European economic recovery, then US economic recovery would likely slow and the
risk of a double-dip recession would rise. This would hurt all of the banks in our
coverage as credit losses would remain elevated for longer and revenue pressures
could increase.
MOST EXPOSURE:
State Street (STT, $41.34, N – TP $54.50)

Citigroup (C, $4.00, OW – TP $5.50)
Bank of America (BAC, $16.18, OW – TP $23.50)
Trust banks are relatively more exposed to FX, primarily in FX trading businesses
which would benefit from higher FX volatility. Within the trust banks, State Street
should likely benefit the most from rising FX volatility and volumes. Citi would also
be relatively the most exposed from a weaker euro but negatively unlike the trust
banks. Bank of America also has a moderate exposure to a weaker euro from lower
earnings contribution.
LEAST EXPOSURE
PNC Financial (PNC, $64.14, OW – TP $77)

Wells Fargo (WFC, $30.82, OW – TP $39)
BB&T (BBT, $32.24, N – TP $36)
Regional banks such as PNC, Wells Fargo, and BB&T as well as smaller regional
banks are primarily US-focused and have minimal direct exposure to foreign
countries.
30
US Exchanges
CME Has the Least FX Exposure and Benefits from the Volatility in FX
To minimize the impact of volatility in FX on earnings we would recommend the

Kenneth B. Worthington, CFA AC shares of CME over those of NYSE Euronext. CME volumes benefit from the
(1-212) 622-6613
volatility in the markets, and we expect volatility to be high given increased concerns
kenneth.b.worthington@jpmorgan.com
around the economic and political stability in the Eurozone and its spillover effect to
Funda Akarsu the US. NYSE Euronext has the most FX exposure in the exchanges universe as
(1-212) 622-5319
approximately 50% of its revenues come from Europe. That said, NYX has a natural
funda.m.akarsu@jpmorgan.com
hedge to FX movements through the offset from its European-based expenses. Thus,
NYX has FX exposure and can be hurt from the weakening of the euro and the
Company Name Ticker Rec sterling to some extent but not to the level CME likely would benefit from the
BM&F Bovespa BVMF3.SA OW volatility in FX rates.
CME Group Inc. CME OW
Investment Technology ITG N
Group MOST EXPOSURE: NYSE Euronext (NYX, $29.29, N – TP $29)
Knight Capital Group NITE N
MF Global MF OW We see NYSE Euronext as having the most exposure to FX among the exchanges
NASDAQ Stock Market NDAQ N under our coverage. NYX generates approximately 50% of its revenues in Europe,
NYSE Euronext NYX N
Penson Worldwide PNSN RS and the rest in the US. That said, NYX has a natural hedge to the weakening of the
The Intercontinental ICE RS euro as the expenses in Europe are a natural offset to the potential decline in
Exchange
revenues. We continue to rate NYX Neutral due to pricing pressure in cash and
derivative trading, offset by high derivative trading volumes in Europe.
LEAST EXPOSURE: CME Group (CME, $315.19, OW – TP $360)

We see CME as having the least exposure to FX among the exchanges under our
coverage, and potentially benefiting from the volatility in FX. As volatility spurs
volume growth, we see CME volumes rising given the unstable macro environment
in the Eurozone and its spillover effect to the US. CME volumes have been strong
since mid-April, up 27% y-o-y 2Q10 to date where FX volumes were up 76% y-o-y.
We also think FX volume could increase as volatility rises as foreign central banks
diverge in their rate policies. We continue to recommend CME based on volume
fundamentals, as we continue to expect 2010 to be a volatile year. We like CME on a
thesis that re-leveraging, economic and rate volatility, and high-frequency traders
will lead to better-than-expected earnings growth in 2010.
31
32
Life Science Tools & Diagnostics
Health Care
Tools Most Exposed to Continued FX Erosion, but Underlying Demand Should Be Sheltered
Tycho W. Peterson AC Within our coverage universe, life science tools remain the most susceptible to the
(1-212) 622-6568 sovereign crisis in the Euro area, given higher-than-average exposure (~25-40%) to
tycho.peterson@jpmorgan.com Euro area-based revenue, as compared to diagnostic suppliers (5-25%), CROs (14-
Sung Ji Nam 45%), and SMid cap medical device companies (~10-30%).
(1-212) 622-4958
Since 4Q09, revenue growth in life science tools has been buoyed by FX tailwinds
sung.j.nam@jpmorgan.com
(average of +5% FX vs. +5% LC in 4Q09; +5% FX vs. +7% LC in 1Q10), and a
Abigail Darby further weakening of the euro against the USD would result in downside revisions to
(1-212) 622-6568 Street estimates and could hamper continued outperformance (+13% YTD vs. +9%
abigail.w.darby@jpmorgan.com
Russell 2000 and +3% S&P 500).
On the other hand, fundamentals of the life science tools group remain strong on an
Company Name Ticker Rec absolute basis relative to other sectors in healthcare, and demand within the Euro
Accuray ARAY N
Affymetrix AFFX N
area should be more sheltered, given a pickup in biotech financing, improving
American Medical Systems AMMD OW visibility post consolidation by pharma companies, benefits from global stimulus
Beckman Coulter BEC OW disbursements (the largest impact to date has come from stimulus funds in
Bruker Corporation BRKR OW
Charles River Laboratories CRL RS Japan/China), and regulatory drivers (food testing, emissions monitoring, etc.).
Covance CVD OW
Genomic Health GHDX N Specifically, in our universe, BRKR (60% of sales in Europe) and MTD ($112.46,
Gen-Probe GPRO OW OW) (40% of sales in Europe) have the most top-line exposure, although both have
Hologic HOLX OW
ICON Plc ICLR OW larger expense bases versus sales in Europe (and would see OMs benefit from a
Illumina, Inc. ILMN OW weaker EUR/CHF versus USD), while both also use forward FX contracts (typically
Intuitive Surgical, Inc. ISRG N
Life Technologies Corporation LIFE OW 1-3 months) to manage bottom-line exposure. TMO (24% of sales in Europe)
Luminex LMNX N remains the least exposed, and should continued FX erosion result in downside
Mettler-Toledo MTD OW
Millipore Corp MIL N revisions to Street estimates, we see the situation as an opportunity for TMO to close
Myriad Genetics Inc. MYGN OW the valuation gap versus peers. Other companies with notable top-line exposure
Sirona Dental Systems Inc SIRO OW
SonoSite SONO OW
include ICON (ICLR, $27.26, OW) (45% of revenues from Europe) and SIRO
Thermo Fisher Scientific TMO OW ($37.17, OW) (53% of revenues, 23% from Germany), although the earnings impact
Varian Medical VAR N for both is expected to be largely hedged, given the geographic footprint (i.e.,
Waters WAT N
WuXi PharmaTech WX RS European headquarters).
MOST EXPOSURE: Bruker (BRKR, $13.21, OW – TP $17)
With 60% of sales in Europe, BRKR is most exposed on the top line among tool
companies, although with ~70-75% expenses denominated in EUR (majority of
R&D), the company is well hedged, and GMs should actually benefit.
LEAST EXPOSURE: Thermo-Fisher Scientific (TMO, $51.41, OW – TP $60)
With 24% of sales in Europe, TMO has the least exposure relative to peers, and
should continued FX erosion result in downside revisions to Street estimates, we see
the situation as an opportunity for TMO to close the valuation gap.
Life Science Tools
AFFX BRKR ILMN LIFE MIL MTD TMO WAT
U.S. 58% 21% 52% 44% 40% 35% 61% 31%
Europe 27% 60% 30% 34% 40% 40% 24% 33%
Asia/ROW 15% 19% 14% 22% 20% 25% 15% 36%
Total 100% 100% 100% 100% 100% 100% 100% 100%
FX Impact (revs)
C1Q09 n/a -8% n/a -4% -7% -7% -5% -5%
C2Q09 n/a -8% n/a -6% -2% -7% -4% -5%
C3Q09 n/a -2% n/a -2% -3% -2% -2% -1%
C4Q09 n/a 10% n/a 4% 5% 5% 3% 4%
C1Q10 n/a 8% n/a 4% 5% 5% 3% 4%
Source: Company reports and J.P. Morgan estimates.
33
Medical Supplies & Devices

Industry FX Exposure Significant; History Suggests Tougher Times Ahead
Michael Weinstein AC On average, the MedTech industry derives roughly 45% of revenue from outside the
(1-212) 622-6635 US, with more than 25% coming from Europe. While most of the companies in the
mike.weinstein@jpmorgan.com group seek to minimize the effect of currency fluctuations on their bottom line
Christopher Pasquale through hedging contracts, these mechanisms are imperfect and do not fully
(1-212) 622-6590 eliminate the impact of FX on industry earnings. Perhaps as a result, the
christopher.t.pasquale@jpmorgan.com directionality of sector relative performance is closely correlated with currency
Kimberly Gailun movements, something we’ve noted several times in the past. Since 1999, the large
(1-617) 310-0740 cap MedTech group has outperformed the S&P 500 77% of the time when FX was
kimberly.w.gailun@jpmorgan.com
meaningfully (>1.0%) positive, while underperforming 63% of the time when rates
Ross Comeaux were a significant headwind for the group. This relationship has been even tighter in
(1-212) 622-1895 recent years, with a currency tailwind corresponding with industry outperformance
ross.w.comeaux@jpmorgan.com
83% of the time since 2003 and a headwind being associated with the same
J.P. Morgan Securities Inc. frequency of underperformance. We currently expect FX to shift to a net headwind
on sector top-line growth starting in 3Q10, with the full-year impact seen as
Abbott Laboratories ABT OW modestly negative.
Alcon, Inc ACL N
Baxter Intl BAX N
Becton, Dickinson & Co BDX N
MOST EXPOSURE: Becton, Dickinson (BDX, $73.66, N – TP $82)
Boston Scientific Corporation BSX N
C.R. Bard Inc. BCR OW While all of our names are exposed to currency fluctuations to some extent, BDX
CareFusion CFN N stands out as one of the most vulnerable due to its geographic mix. Becton derives
Covidien COV OW
Edwards Lifesciences EW UW 55% of its sales from overseas with 35% coming from Europe, both of which rank
ev3, Inc. EVVV OW among the highest exposures of the large cap MedTech group. In addition, while
Integra LifeSciences IART OW
Johnson & Johnson JNJ N
Becton is currently hedged on the euro, these contracts are set to expire at the end of
Kinetic Concepts, Inc KCI N its September fiscal year. Currency was a 420bp drag on the company’s top line in
Medtronic MDT OW
NuVasive, Inc. NUVA OW
FY09 and is expected to be roughly neutral to revenue growth in FY10 at current
St Jude Medical STJ OW rates. In terms of earnings impact, we estimate that FX translation gains of ~$0.17 in
Stryker Corp SYK N
Talecris Biotherapeutics TLCR OW
FY10 will be mostly offset by $0.12 in losses from hedging contracts. These losses
The Cooper Companies, Inc. COO UW could create an “easy comp” in FY11 as BDX’s hedges roll off. However, the net
Zimmer Holdings ZMH OW
impact of currency on the company’s results is still expected to swing from positive
to negative, while the lack of forward protection potentially exposes Becton to
greater earnings volatility as a result of FX movements going forward.
LEAST EXPOSURE: C.R. Bard (BCR, $82.97, OW – TP $93)

Bard is among the least exposed companies in our group to currency fluctuations,
with just 32% of its revenue derived from international markets and only 20%
coming from Europe. The company also actively hedges its FX exposure, limiting
the drop through to its bottom line. Currency was a 220bp drag on the company’s top
line in 2009 and is expected to be modestly positive to revenue growth in 2010 at
current rates. Besides its relative insulation from FX volatility, we continue to like
Bard from a fundamental perspective, with strong cash flow, stable 6-8% top-line
and 10-12% EPS growth, and the potential for improving business conditions going
forward. We also see option value in the company’s pipeline, which could return
BCR to the premium growth status that it has enjoyed for most of the last decade.
34
Pharmaceuticals
Increasing Exposure Due to Growing ex-US Presence
Chris Schott, CFA AC With roughly 55% of sales for the US Major Pharmaceuticals group coming from
(1-212) 622-5676 outside the US, including roughly 25% of sales from Europe, a strengthening in the
christopher.t.schott@jpmorgan.com US dollar would clearly have a top-line impact. That negative impact is muted by a
Jessica Fye significant ex-US cost structure as well as company-specific hedging strategies.
(1-212) 622-4165 However, the strengthening dollar is overall net negative to earnings, the impact of
jessica.m.fye@jpmorgan.com
which varies name by name.
Dewey Steadman, CFA
(1-212) 622-5350 Based on current rates, we would estimate a 3-4% overall top-line headwind for the
dewey.d.steadman@jpmorgan.com group in 2010 with less of an impact in 2Q and more of an impact in the second half
J.P. Morgan Securities Inc. of the year.
MOST EXPOSURE: Pfizer (PFE, $16.46, OW – TP $24)

Allergan AGN N With roughly 60% of sales coming from outside the US, Pfizer is most exposed to
Biovail BVF OW
Bristol-Myers Squibb Company BMY N FX swings within our US major pharma coverage. As a rule of thumb, every $0.01
Cephalon, Inc. CEPH OW move in the USD/EUR exchange rate is worth roughly $0.01 to Pfizer’s annual EPS.
Eli Lilly & Company LLY UW
Endo Pharmaceuticals ENDP OW The company issued 2010 guidance of $2.10-2.20 in early February when the
Forest Laboratories, Inc FRX UW exchange rate was roughly $1.40, implying a roughly $0.10 FX headwind to earnings
Hospira, Inc. HSP OW
Impax Laboratories IPXL OW at current rates. That said, last week, the company posted a solid earnings beat and
Medicis Pharmaceutical Corp. MRX N maintained the guidance despite both the strengthening USD and healthcare reform,
Merck & Co., Inc. MRK OW
Mylan Inc. MYL OW which in our view highlights the financial flexibility of the company following the
Pfizer Inc. PFE OW Wyeth acquisition.
Teva Pharmaceuticals TEVA OW
Warner Chilcott WCRX OW
Watson Pharmaceuticals WPI N LEAST EXPOSURE: Lilly (LLY, $34.62, UW – TP $36)
Lilly generates roughly 45% of sales ex-US. However, unlike its peers, a
strengthening USD has had a neutral/slightly positive impact on LLY’s EPS. While
LLY’s top line is exposed to FX headwinds, LLY typically holds 12 months of
product inventory at its ex-US subsidiaries. As a result, accounting for international
inventories has the effect of reducing COGS and increasing gross margins when the
dollar strengthens (and the reverse when the USD weakens). Over the past 18 months
of FX volatility, this gross margin effect has more than offset the top-line pressure,
leaving Lilly least exposed among its peers.
35
36
Chemicals
Materials
Currency Exposure in Chemicals
Jeffrey Zekauskas AC Demand for chemicals and specialty materials in Europe represents 25-30% of sales
(1-212) 622-6644 for many large capitalization chemical companies. This percentage is likely to shrink
jeffrey.zekauskas@jpmorgan.com over time as chemical demand and production continues to expand at a faster pace in
Silke Kueck the Asia Pacific regions relative to growth in the Western hemisphere.
(1-212) 622-6503
silke.x.kueck@jpmorgan.com Chemical companies are subject to general currency translation risks affecting sales
Olga Guteneva growth. These risks are hedged by regional production, which typically accounts for
(1-212) 622-6488 more than 50% of regional demand, and by debt held in offshore jurisdictions. We
olga.v.guteneva@jpmorgan.com believe Chemical companies to a large extent do not substantially hedge against
Ben Richardson currency fluctuation. Referencing DuPont (DD, $36.23, OW) as the Chemical
(1-212) 622-6455 bellwether, overall currencies contributed 1% to annual sales growth in 2005, 0% in
ben.richardson@jpmorgan.com 2006, 3% in 2007, 3% in 2008, and currencies were a (3%) headwind to sales in
J.P. Morgan Securities Inc. 2009.
Company Name Ticker Rec The Specialty Chemical companies with sizeable exposure to Europe-based sales
Agrium AGU N include Rockwood (ROC) and Pall Corporation (PLL). Companies with minor
Air Products and Chemicals APD RS
Albemarle Corporation ALB N exposure to Europe-destined sales include Sherwin-Williams.
Ashland Inc. ASH OW
Avery Dennison AVY OW
Cabot Corporation CBT N MOST EXPOSURE:
CF Industries Holdings, Inc. CF N
Compass Minerals CMP N Rockwood (ROC, $25.40, OW – TP $35)
International, Inc.
Dow Chemical DOW N Rockwood’s sales derived from European customers represent 52% of 2009
DuPont DD OW consolidated sales. Germany marks the largest exposure to Rockwood, accounting
Eastman Chemical Company EMN OW
Ecolab Inc. ECL N for 40% of consolidated sales. The large exposure to Germany is rooted in
Ferro Corp FOE OW Rockwood’s 2004 acquisition of Dynamit Nobel. We estimate that a 1% change in
Georgia Gulf GGC OW
H.B. Fuller FUL OW the euro would affect annual earnings by $0.02-0.03 per share. We believe that a
Huntsman Corporation HUN N portion of the currency exposure may be hedged in 2010, though the company does
Innophos IPHS N
Innospec IOSP N not disclose the detail or magnitude of the hedge. ROC occasionally enters into
International Flavors & IFF N cross-currency interest rate swaps to hedge exposure to its euro-denominated debt.
Fragrances
Lubrizol Corporation LZ N
Minerals Technologies MTX OW Pall Corporation (PLL, $35.18, N – TP $35)
Monsanto MON N
Nalco NLC N Pall Corporation’s sales to the European region represent 41% of F2009 consolidated
Novozymes NZYMb.CO N
Pall Corporation PLL N sales. Sales to the industrial end markets (aerospace, microelectronics, and general
Polypore International PPO OW industrial applications) in Europe represent 37% of segment sales, and sales to the
Potash Corp. POT N
Praxair PX N European healthcare markets (blood filtration and biopharmaceuticals) represent 47%
Rockwood Holdings ROC OW of segment sales. We estimate that a 1% change in the euro would affect annual
RPM International Inc. RPM N
Scotts Miracle-Gro Co. SMG N earnings by approximately $0.01 per share. The company hedges its exposure to
Sherwin-Williams SHW N currency-denominated receivables and payables through forward foreign exchange
Synthesis Energy Systems, SYMX N
Inc. contracts.
The Mosaic Company MOS N
Valspar Corp VAL N LEAST EXPOSURE:
WD-40 Company WDFC OW
Westlake Chemical Corp. WLK OW
Sherwin-Williams (SHW, $75.95, N – TP $81)
Sherwin-Williams’ sales are largely domestic with 3,357 company-owned US Paint
Stores accounting for almost 60% of company sales. Sherwin-Williams International
Coatings segment distributes a variety of paint and coatings products predominately
in South America (Brazil and Chile) where the company also operates stores. Sales to
the offshore regions represent less than 20% and sales to Europe represent ~5% by
our estimates. Sherwin does enter into short-term option and forward currency
exchange contracts to hedge against value changes in foreign currency.
37
Metals & Mining

Dollar Up Against the Euro but Commodity-Based Currencies Still Strong Against the Dollar
Michael F. Gambardella AC Most metals (bulks, base, and precious) are priced globally in US dollars, and, in
(1-212) 622-6446 general, a strengthening dollar is seen as a negative for metals prices for two reasons.
michael.gambardella@jpmorgan.com The first is that a rising dollar makes the metals more expensive, which could
Tyler J. Langton potentially weigh on demand. The second is that most of the world’s metals are
(1-212) 622-5234 produced outside the US, especially in Australia, Brazil (and other countries in South
tyler.j.langton@jpmorgan.com America), and Canada. As the dollar strengthens, metals and mining companies in
Brian P. Ossenbeck these regions benefit from higher revenues while their costs are denominated in their
(1-212) 622-1023 local currencies. As a result, they can’t use cost pressures from currency to push
brian.p.ossenbeck@jpmorgan.com
metal prices higher.
The recent strengthening in the dollar against the euro has caused some concern for
Company Name Ticker Rec investors as they fear it will lead to lower metal prices. However, we think it is more
AK Steel AKS N
Alcoa AA N important to look at the dollar against commodity-based currencies such as the
Allegheny Technologies ATI N Australian dollar, Brazilian real, and Canadian dollar. These currencies have
Arcelor Mittal MT OW
Carpenter Technology CRS N remained strong against the US dollar, and we believe the metal prices should remain
Century Aluminum Company CENX N firm as China continues to grow off of a steadily increasing base and developed
Cliffs Natural Resources CLF OW
Commercial Metals CMC N markets continue to rebound.
Dynamic Materials BOOM N
Freeport-McMoRan Copper FCX OW
& Gold
MOST EXPOSURE: Arcelor Mittal (MT, $33.80, OW – TP $57)
Gerdau Ameristeel GNA OW
Globe Specialty Metals GSM OW LEAST EXPOSURE: Steel Dynamics (STLD, $14.87, OW – TP $19.50)
GrafTech International GTI N
Haynes International HAYN N Of the companies we cover, Arcelor Mittal has the greatest exposure to the euro, with
Nucor Corp. NUE OW approximately 52% and 54% of its revenues in 2009 and 2008, respectively, coming
Reliance Steel & Aluminum RS N
Steel Dynamics, Inc. STLD OW from Europe. Since MT reports in dollars and does not hedge its currency exposure
Teck Resources TCKb.TO OW (though it does hedge some of its raw material costs that are bought in Europe but
Thompson Creek Metals TC OW
U.S. Steel Corp X OW priced in dollars), a decline in the euro could clearly weigh on its earnings. That said,
Worthington Industries WOR N MT could see some relief as its products would become more competitive in other
export regions such as Eastern Europe, Africa, and the Middle East. The domestic
minimills Steel Dynamics and Gerdau Ameristeel (GNA, $7.43, OW) sell virtually
all of their products in the US, and have very limited exposure to the euro.
38
Paper & Packaging

Stronger Dollar Generally Unhelpful for Paper and Packaging
Claudia Shank Hueston AC Strong US dollar is generally negative for the US paper and packaging sector. In
(1-212) 622-6596 general, a strong US dollar is negative for the paper and packaging industry because
claudia.hueston@jpmorgan.com of the (1) adverse translation effect from overseas earnings and revenues; (2) less
Mark Masters favorable trade flows; and (3) diminished ability for US producers to push through
(1-212) 622-5469 price hikes overseas.
mark.a.masters@jpmorgan.com
Ariel Avila • Translation: In general, the translation impact is more significant for the
(1-212) 622-8021 packaging companies under our coverage than the paper and forest products
ariel.x.avila@jpmorgan.com names, given that the packagers tend to derive more of their revenues from
J.P. Morgan Securities Inc. overseas markets.
Company Name Ticker Rec • Decreased competitiveness: A stronger US dollar diminishes the
AptarGroup ATR N competitiveness of US manufacturers, increasing imports and reducing exports.
Ball Corp. BLL OW
Bemis Co. BMS UW This trade-flow impact is more significant for the paper companies than it is for
BWAY BWY N the packagers. Grades that historically have been the most sensitive to currency
Cellu Tissue Holdings CLU OW
Crown Holdings CCK OW movements have been coated paper and uncoated groundwood, although, more
Domtar UFS OW recently, we’ve seen a marked expansion in US shipments of containerboard,
International Paper Co. IP N
Kadant, Inc. KAI N bleached board, and newsprint to overseas markets.
Louisiana-Pacific Corp LPX UW
MeadWestvaco MWV OW • More challenging price hikes (especially pulp). A strong dollar can make it
O-I OI OW
Packaging Corp. of PKG UW more difficult to push through commodity price increases in overseas markets.
America This trend is particularly true in pulp, which is a global dollar-denominated
Pactiv Corp PTV OW
Plum Creek Timber PCL N commodity that has hitherto benefited from the weakness of the dollar in the past
Rayonier RYN N in order to drive up pulp prices. When the dollar is strong, it is tougher to get pulp
Rock-Tenn RKT OW
Sappi SPP N price increases pushed through in Europe (which is a net importer of pulp).
Sealed Air SEE UW
Silgan Holdings Inc SLGN N But if oil and gas prices drop, there could be opportunities for margin
Sonoco SON OW
Stora Enso STERV.HE OW expansion. That said, if the strengthening of the US dollar translates into materially
Temple-Inland TIN N lower oil and natural gas prices, then the paper sector as a whole (particularly
UPM Kymmene Corp UPM1V.HE OW
Verso Paper VRS N paperboard producers) and the resin-based flexible packagers could benefit – at least
Weyerhaeuser Company WY N temporarily – from a period of margin expansion, as input costs would be easing and
price initiatives would still be working through the system.
Finally, if a stronger dollar is the result of a broader global slowdown, we would

generally highlight more defensive packaging names as better to own in a weakening
global economy, given the focus on food and beverage markets and the stability and
strength of cash flows.
MOST EXPOSURE: O-I (OI, $30.45, OW – TP $42)

OI is the world’s leading glass container manufacturer and generates ~75% of its
revenues outside of the US and ~70% outside of North America. Its largest foreign
exposure comes from Europe (42% of its 2009 revenues), followed by South
America (~16% of ’09 revenues) and Asia-Pacific (~13% of ’09 revenues). We
estimate that a 1% move in OI’s top line from FX on an annual basis translates to
~$0.04 in annual EPS – a relatively muted bottom-line impact due to the company’s
large portion of debt denominated in non-US currency (~40% of OI’s total long-term
debt as of 3/31/10) and relatively high labor and fixed costs (foreign currency-
denominated) in each of its operating regions.
We think OI has significant leverage to an improvement in glass volumes and believe
the company is well positioned (good balance sheet, more streamlined asset base, and
strong management team) for recovery in 2010 and 2011. Furthermore, we think the
39
company is taking the right steps to grow its presence in high-growth emerging
markets and believe cost-saving initiatives (most notably the company’s global
footprint initiative) are bearing fruit and should meaningfully add to the bottom line
in 2010 and 2011.
However, if the recent weakness in the euro leads to a slowdown in European
economic activity or a “double dip” in the European economy, then our volume
assumptions for OI could be at risk to the downside. We are currently modeling a 3%
increase in OI’s 2010 European volumes. If European volumes were to be flat in
2010, we estimate EPS would be adversely affected by ~$0.15 in 2010.
LEAST EXPOSURE: Rock-Tenn (RKT, $48.13, OW – TP $65)

Rock-Tenn is a leading US producer of paperboard and folding cartons that supply
relatively defensive end markets (mostly food and beverage) predominately in North
America. The company derives ~90-95% of its sales domestically with modest
international operations in Mexico, Chile, and Argentina.
RKT is a low-cost producer in its packaging grades, which, combined with the
stability of its end markets, results in consistent and healthy FCF generation
throughout the cycle. We are forecasting RKT to generate $300 million in FCF in
2010 (16% FCF yield) and hit 2.1x net debt/EBITDA by YE10. Meanwhile, RKT
valuation is attractive in our view – trading at 8x our 2011 EPS estimate – and is our
top pick in the paper sector.
LEAST EXPOSURE: Pactiv Corp (PTV, $23.60, OW – TP $32)

Pactiv is a leading producer of consumer and foodservice/food packaging products
(primarily plastic) and holds a number one or number two market position in 80% of
its product lines. The company operates 43 manufacturing facilities in North America
(96% of its sales in 2009), one in Germany, and participates in two joint ventures in
China. PTV has a strong consumer presence by way of its Hefty branded products
(trash bags, food storage bags, cups, and cutlery) in its Consumer segment, while
supplying packaging materials to food distributors, fast-food restaurants, food
processors, and grocery chains through its Foodservice segment.
We expect PTV to grow volumes 9-10% in 2010 on the back of (1) market share
gains; (2) a modest market recovery, and (3) its recent PWP acquisition. Meanwhile,
we expect the company to generate $340 million in FCF in 2010 with an aim of
creating shareholder value through accretive “tuck-in” acquisitions, share buybacks,
and/or a potential dividend. Valuation is compelling at 10.6x our 2010 EPS estimate
versus its 14.7x five-year historical average and 13.7x for the flexible packaging
group.
40
Advertising & Marketing Services and Publishing
Media & Telecommunications

Expecting Minimal Earnings Exposure at Agencies from FX Moves
Alexia Quadrani AC We evaluated our Publishing, Advertising, and Marketing Services coverage to
(1-212) 622-1896 determine whether recent currency fluctuations could have a meaningful impact on
alexia.quadrani@jpmorgan.com earnings. Our agency stocks have a bit more exposure to the euro and other foreign
Monica DiCenso, CPA currencies than our Publishing universe, but overall we don’t expect a material
(1-212) 622-0473 impact to any of our earnings estimates.
monica.dicenso@jpmorgan.com
Townsend Buckles, CFA, CPA Gannett (GCI, $15.05, N) is the only newspaper stock with meaningful currency
(1-212) 622-0461 exposure, as a result of its Newsquest operation in the UK. However, at an estimated
townsend.buckles@jpmorgan.com 15% of newspaper segment revenues, and less than 10% of overall company
J.P. Morgan Securities Inc. revenues, we don’t estimate a meaningful impact to our 2010 EPS estimate of $2.35
from recent movement in the British Pound.
Arbitron ARB N Agencies have more currency exposure with significant operations in
Cinemark CNK OW
Clear Channel Outdoor CCO N international markets. As detailed in the charts below, each of our agency stocks
Gannett Company GCI N earns a significant amount of revenues outside of the US.
Harte-Hanks, Inc HHS OW
Interpublic Group of Companies IPG OW
Lamar Advertising Co. LAMR OW Figure 4: Advertising and Marketing Services – Geographic Distribution of Revenues, 2009
Monster Worldwide Inc MWW OW
National CineMedia, Inc. NCMI OW OMC IPG
New York Times Company NYT N
Other, 17% Other, 6%
Omnicom Group OMC OW Asia/Pacific,
Regal Entertainment RGC OW 9%
Scripps Networks Interactive SNI OW
The E.W. Scripps Company SSP OW Latin America,
The McClatchy Company MNI N 5%
Valassis Communications VCI N
Europe, 22% U.S., 53%
ValueClick VCLK N Europe, 14%
WPP Group WPP.L N U.S., 58%
UK, 8%
U.K., 9%
WPP
Rest of World,
26%
North America,
36%
Western Cont
Europe, 26%
UK, 12%
Source: Company reports and J.P. Morgan. Note: Omnicom (OMC, $39.22, OW), Interpublic (IPG, $7.72, OW), WPP Group (WPPGY,
$46.95, N).
However, for most agencies, the international revenues earned and expenses related
to those revenues are denominated in the same currency. As a result, revenue and
expense growth rates may swing, but there is generally a minimal impact to earnings
from currency fluctuations. Some agencies also enter into hedges to further mitigate
risks where expenses may not be in the same currency as revenues or for cash
transfers between jurisdictions, helping to further minimize earnings risk.
41
Information Services & Broadcasting

Information Services
Michael Meltz, CFA AC All but one (VRSK) of the Information Service stocks we cover (DNB ($74.10),
(1-212) 622-0416 EFX ($31.58), EXPN.L (572p), MCO ($23.36), MHP ($30.28), JWa ($40.23), FDS
michael.meltz@jpmorgan.com ($70.56), IT ($22.59), SLH ($36.75), VRSK ($27.72), IHS ($50.55), TRI ($36.09))
David Lewis, CPA AC generate 25%-plus of revenues from outside the US. The impact of a strengthening
(1-212) 622-6435 dollar would likely have a modestly negative impact on revenues/profits across the
david.m.lewis@jpmorgan.com group – but for most of the names probably not enough to impact estimates
Nadia Lovell materially. Many of the Information Service companies hedge FX exposure. We
(1-212) 622-4885 would expect to see some translation gains reversed if the dollar strengthens. In most
nadia.s.lovell@jpmorgan.com
cases we do not see input costs falling due to the strengthening dollar as cost of
J.P. Morgan Securities Inc. goods sold generally represents human capital rather than physical commodities. The
TV & Radio Broadcasting companies generally have very little international revenue
Belo Corp. BLC N exposure.
CBS Corporation CBS OW
D&B DNB N
Equifax EFX OW
MOST EXPOSURE: John Wiley & Sons (JWa, $40.23, N – TP $45)
Experian plc EXPN.L OW
FactSet Research Systems FDS N Wiley is the most exposed to changes in foreign currency among our info service
Gartner Inc. IT OW names. We estimate 49% of Wiley revenues are non-US dollar denominated.
IHS Inc. IHS N
John Wiley & Sons JWa N
Roughly 25% of these non-US dollar revenues are unhedged on the operating income
Martha Stewart Living Omni. MSO N line. Management does not use hedging strategies. Current rates suggest foreign
Meredith Corporation MDP N
Moody's Corp. MCO OW
currency translation could weigh on EPS by $0.10-0.15 in F2011. Wiley does not
Primedia PRM N disclose individual currency exposure. The euro and British pound represent the
Sinclair Broadcast Group SBGI N
Solera Holdings SLH OW
majority of the non-US dollar exposure.
The Knot, Inc. KNOT N
The McGraw-Hill Companies MHP OW MOST EXPOSURE: Solera Holdings (SLH, $36.75, OW – TP $44)
Thomson Reuters TRI N
Verisk Analytics VRSK OW Roughly 78% of revenues are non-dollar denominated, mostly in euros. A 1%
strengthening of the US dollar will negatively impact revenues by 30 basis points and
EBITDA by 20 basis points (and vice versa). In recent years, management has
backed away from active hedges and focused on natural hedges through the
repositioning of its global workforce.
LEAST EXPOSURE: FactSet (FDS, $70.56, N – TP $75)

FactSet is long expenses of $150 million in annual terms. FactSet’s exposure is
heavily weighted to the pound and euro. In aggregate, those currencies represent 70%
of the total exposure. (Approximately 97% of revenues are billed in US dollars.) A
1% change in the US dollar increases or decreases EPS by more than a penny in
annual terms. In early March, FDS hedged euro and pound exposure for the next
three quarters. The hedge locks in a reduction of $750,000 of operating expenses
related to the euro and the pound. The other 30% remains unhedged. Over the next
three quarters, FactSet could realize translation gains for the 30% unhedged cost
exposure.
LEAST EXPOSURE: Verisk (VRSK, $27.72, OW – TP $35)

Verisk is an outlier among the information service names as it’s the only name under
coverage with under 5% non-US dollar exposure.
42
Internet
In the Internet Space, Netflix Least Exposed to FX
Imran Khan AC In the Internet space, several of the large cap companies (Google (GOOG, $493.14,
(1-212) 622-6693 OW), eBay (EBAY, $21.48, N), and Amazon (AMZN, $124.98, OW)) generate
imran.t.khan@jpmorgan.com roughly half of revenue internationally; the company with the greatest portion of
Bridget Weishaar sales coming from abroad is Priceline (PCLN, $225.39, OW) (~71% of gross
(1-212) 622-5032 profits), while Expedia (EXPE, $22.00, N) (35%) and Yahoo! (YHOO, $15.29, OW)
bridget.a.weishaar@jpmorgan.com (25%) are less exposed. Hedging strategies differ, with Google as the most
Lev Polinsky aggressive hedger. Excluding the impact of hedging, we believe 60% of Google’s
(1-212) 622-8343 EBITDA is exposed to FX risk, compared to 71% of Priceline’s and 57% of eBay’s.
lev.x.polinsky@jpmorgan.com
Amazon’s lower international margins mean its profits are less exposed, with ~39%
Shelby Taffer of the total operating income pie driven by international operations.
(1-212) 622-5032
shelby.x.taffer@jpmorgan.com Further, many of these companies derive a significant proportion of their
J.P. Morgan Securities Inc. international results from geographies (Asia, Australia, Latin America, Canada)
where currencies that have not depreciated vs. the dollar in the same way as
Company Name Ticker Rec European ones.
Amazon.com AMZN OW
AOL Inc. AOL N
Blue Nile NILE UW MOST EXPOSURE: Priceline (PCLN, $225.39, OW – TP $300)
Dice Holdings, Inc. DHX N
Discovery Communications DISCA OW We estimate ~71% of Priceline’s gross profits and EBITDA are derived from its
eBay, Inc EBAY N
Expedia, Inc. EXPE N international operations. We continue to see international growth as a key part of our
Google GOOG OW Overweight thesis.
IAC/InterActive Corp. IACI N
MercadoLibre, Inc. MELI N
Netflix Inc NFLX OW LEAST EXPOSURE: Netflix (NFLX, $91.09, OW – TP $110)
News Corporation, Inc. NWSA N
Orbitz Worldwide, Inc. OWW N Virtually none of Netflix’s operations are outside the US; as such, we think the
Priceline.com PCLN OW impact on the company from dollar strength is likely to be extremely minimal.
QuinStreet, Inc. QNST OW
Shutterfly, Inc. SFLY OW QuinStreet (QNST, $15.43, OW) and Shutterfly (SFLY, $21.12, OW) also have
The Walt Disney Co. DIS N minimal international exposure.
Time Warner TWX N
Viacom Inc VIAb OW
Xinhua Sports & Entertainment XSEL N
Yahoo Inc YHOO OW
43
44
Technology
Business Services
FX Fluctuations Viewed More as Optics
Andrew C. Steinerman AC The staffing sector is increasingly becoming more global as large, international
(1-212) 622-2527 clients seek global staffing vendors. Over the years, we have observed further secular
andrew.steinerman@jpmorgan.com adoption in Europe and Asia, as end users recognize the value proposition of temp
William W. Lee staffing and other countries deregulate their staffing markets.
(1-212) 622-2596
wlee2@jpmorgan.com MOST EXPOSURE: Manpower (MAN, $49.10, OW – TP $70)
Jeffrey Y. Volshteyn Manpower generates the majority (approximately 85%) of its revenues
(1-212) 622-2940
internationally: France accounts for approximately 30% and Other EMEA (excluding
jvolshteyn@jpmorgan.com
France) represents approximately 40%. We feel that the fluctuation in currency is
mainly optics, rather than a drag on the underlying business, since the company bills
Company Name Ticker Rec clients and pays workers in the same currency for the most part. As such, currency
American Reprographics ARP N translation does not have a margin impact, although it does optically swing EPS.
Company
Apollo Group APOL OW MAN management provides a clear indication of FX assumptions in its guidance.
Bridgepoint Education BPI N We estimate a 1% increase in the US dollar vs. the euro would drag Manpower’s
Capella Education CPLA N
CDI Corp. CDI N annualized EPS by approximately $0.02. Other currencies have a more modest
Cintas CTAS N impact.
DeVry DV N
Education Management EDMC N
G&K Services GKSR UW LEAST EXPOSURE: SFN Group (SFN, $7.08, UW – TP $8)
Iron Mountain IRM OW
ITT Educational Services Inc ESI N SFN generates most of its revenues in the US, with a small portion (less than 4%)
Manpower Inc MAN OW coming from Canada. We believe of all the staffing companies, SFN will have a de
Resources Global Professionals RECN N
Robert Half International RHI OW minimis impact on its bottom line from the strengthening dollar.
SFN Group SFN UW
Strayer Education STRA OW
UniFirst UNF N
45
Communications Equipment & Data Networking

Euro Depreciation Equals Margin Compression for Alcatel-Lucent; Least Impact for QCOM
Rod Hall, CFA AC Of the 9 companies we cover, 6 are US-based companies with a moderate but still
(1-415) 315 6713 material exposure to the euro given that typically ~15-25% of revenue comes from
rod.b.hall@jpmorgan.com Europe (and is chiefly EUR- or GBP-denominated). Most have hedging programs in
James Kisner place that mute the impact of currency fluctuations near term (3-12 months). We
(1-415) 315-5627 believe Ericsson (ERICb.ST, SEK76.95, UW) is among the more proactive in
james.m.kisner@jpmorgan.com managing currency risk, hedging based on a rolling 12-month exposure forecast
J.P. Morgan Securities Inc. (though we believe average hedge duration is shorter than 12 months).
Malvika Gupta
(44 20) 7742-0939
Starting with US companies, Motorola (MOT, $6.60, UW) generates only 17% of
malvika.x.gupta@jpmorgan.com total company sales from EMEA, but 25% of Enterprise Mobility (EMS) revenue
J.P. Morgan Securities Ltd.
comes from the region. That division contributed 94% of Q1 operating income (EMS
offset a significant loss in Mobile Devices). For RIMM ($64.92, OW), we estimate
Ashwin Kesireddy that roughly 20% of unit sales and likely a greater portion of revenue come from
(91-22) 6157-3270
ashwin.x.kesireddy@jpmorgan.com
Western Europe. Cisco (CSCO, $24.71, OW) generated 21% of its 2009 revenue
from the European markets, but sells its products there primarily in dollars – thus, we
J.P. Morgan India Private Limited
believe the primary impact would be to the competitiveness of Cisco’s prices.
Alcatel-Lucent ALUA.PA OW ALU, ERIC, and Nokia need to be analyzed from a slightly different angle. As
Cisco Systems CSCO OW discussed in more detail below, we believe ALU has the highest exposure to
Ericsson ERICb.ST UW
Ericsson ADR ERIC UW EUR/USD FX changes due to high US-based costs. We believe ERIC could see
Motorola Inc. MOT UW upside from euro depreciation as 21% of its revenue that is N. America-based is
Nokia NOK1V.HE OW
Palm Inc. PALM N
translated to SEK (assuming the SEK continues to trade in tandem with the euro vs.
QUALCOMM QCOM OW the dollar). Nokia (NOK1V.HE, €8.35, OW) generated just 5% of 2009 sales from
Research in Motion RIMM OW
Tellabs TLAB OW
N. America. However, per the company’s financial filings, a roughly equal
proportion of sales and costs come from dollars and dollar-based currencies.
Therefore, changes in the EUR/USD exchange rate have historically had relatively
modest impacts on operating income.
MOST EXPOSURE: Alcatel-Lucent (ALU, €1.98, OW – TP €2.50)

ALU generated 31% of sales from N. America in 2009. However, we believe ~50%
of ALU’s total revenue and 60% of total expenses are denominated in dollars and
dollar-linked currencies. Thus, euro depreciation would lead to higher revenues, but
margin and earnings compression. We estimate that a further 10% depreciation in the
euro could dilute earnings by ~55% in 2011. Also, investors should be aware that
ALU has significant dollar-denominated debt (€2.8bn, ~55% of debt outstanding).
Dollar appreciation would compress the residual claim of equity holders on the value
of the company (and increase principal outstanding paid in euros). ALU may be
hedged to the extent some of its €5.3bn of cash is held in dollars.
LEAST EXPOSURE: Qualcomm (QCOM, $36.50, OW – TP $42.50)

We estimate that, all else being equal, a 10% depreciation of the euro causes only a
~1-2% change to Qualcomm’s 2010E and 2011E EPS. Many investors actually
under-appreciate its exposure to the euro, as it lists its customers by location,
attributing ~69% of revenues to customers in S. Korea/China/Japan in FY’09
(Europe isn’t listed separately). We estimate that 25% of QCOM’s licensing business
is derived from handset sales denominated in euros which are then converted to
dollars to calculate royalties. The impact of this exposure is limited due to: 1) its
fixed licensing revenues stemming from agreements with Nokia/Samsung; 2) only a
portion of totally company revenues are from QTL; 3) we believe most of QTL
revenues are not Euro-based; and 4) QCOM’s costs are largely dollar-based.
46
Computer Services & IT Consulting

Limited Exposure to Euro for Group
Tien-tsin Huang, CFA AC The Computer Services and IT Consulting sector encompasses payment processors
(1-212) 622-6632 and providers of ancillary services, IT consulting and outsourced services firms,
tien-tsin.huang@jpmorgan.com payroll processors, and other financial technology firms. The sector is characterized
Reginald L. Smith, CFA by 1) multi-year contracts, 2) recurring revenues, 3) strong free cash flow generation,
(1-212) 622-6743 and 4) relatively high incremental margins and operating leverage (with the
reginald.l.smith@jpmorgan.com exception of the IT consulting sub-sector).
Puneet Jain
(1-212) 622-1436 Most stocks under our coverage have relatively little exposure to the euro. Firms use
puneet.x.jain@jpmchase.com FX hedges to offset the margin exposure if revenue and associated costs are
J.P. Morgan Securities Inc. denominated in different currencies.
Company Name Ticker Rec MOST EXPOSURE: MasterCard (MA, $223.09, OW – TP $305)
Accenture plc ACN OW
Alliance Data ADS OW Roughly 30% of MasterCard’s purchase volume is euro-denominated. We estimate
Automatic Data Processing ADP N
Broadridge BR N roughly 20% of revenues are referenced to the euro and every $0.01 change in the
Cardtronics, Inc CATM OW euro/dollar exchange rate is worth ~$0.02 in annualized EPS. Our current ’11 EPS
Cognizant CTSH OW
Computer Sciences CSC N
estimate of $16.10 assumes a $1.32 exchange rate.
ExlService Holdings Inc. EXLS N
FIS FIS N MOST EXPOSURE: Accenture (ACN, $40.32, OW – TP $45)
Fiserv, Inc. FISV N
Genpact G OW ACN generates roughly 30% of its revenue in euros. While FX has limited impact on
Global Cash Access GCA N
Global Payments GPN OW the company’s margins, its earnings will be adversely impacted by the euro’s
Heartland Payment Systems HPY N depreciation vs. the USD. We estimate every $0.05 change in the euro/dollar
Hewitt Associates, Inc. HEW N
MasterCard MA OW exchange rate (roughly 100bps impact on reported revenue growth) hurts the
Paychex Inc PAYX UW company’s EPS by $0.06 on an annualized basis. Our FY11 EPS estimate of $3.03
TNS, Inc TNS OW
VeriFone PAY OW assumes a euro/USD rate of 1.34.
Visa Inc. V OW
Western Union WU OW
WNS Holdings Ltd. WNS UW LEAST EXPOSURE: Alliance Data (ADS, $71.50, OW – TP $78)
Wright Express WXS N
Alliance Data has no exposure to the euro.
LEAST EXPOSURE: Paychex (PAYX, $28.95, UW – TP $28)

PAYX generates more than 99% of its revenue from the US with little exposure to
the euro.
47
IT Hardware
Sustained Strength in US Dollar Would Impact Top Line More So than Bottom Line
Mark Moskowitz AC Recent strength in the US dollar, if sustained, would have an impact on our large cap
(1-415) 315-6702 IT Hardware coverage companies. A stronger US dollar would blunt the revenue
mark.a.moskowitz@jpmorgan.com growth trends on an “as reported” basis, but the earnings impact would not be as
Anthony Luscri widespread, owing to hedging practices.
(1-415) 315-6704
anthony.s.luscri@jpmorgan.com It is no secret that the Greece’s sovereign debt crisis could spill into the rest of
J.P. Morgan Securities Inc. Europe and parts of Asia. In such a case, it is plausible that the US dollar and yen
could strengthen against the euro in coming months. We are not positing that the
Company Name Ticker Rec US dollar continues to strengthen against the euro, but if we were to assume such,
Agilent Technologies A RS
Apple Inc. AAPL OW the large cap companies in our group would be most impacted.
Brocade BRCD OW
Dell Inc. DELL UW Within IT Hardware, all the large cap companies have exhibited three to five points
EMC EMC OW
Emulex Corp. ELX N of currency benefit as relates to “as reported” revenue growth over the past year. If
Hewlett-Packard HPQ OW the US dollar were to strengthen in coming months, we would expect all large caps
IBM IBM OW
Lexmark International LXK N under coverage to exhibit moderating top-line growth.
National Instruments NATI OW
NetApp NTAP N Meanwhile, the SMid cap component companies within our coverage denominate all
QLogic Corporation QLGC UW
Seagate Technology STX N sales in US dollars, so we would not expect any drag on top-line growth if the
STEC STEC N US dollar were to strengthen. The only hit here would be if the currency swings have
Voltaire VOLT N
Western Digital WDC N an impact on purchasing power in the impacted regions, resulting in dampened
Xerox Corporation XRX N demand prospects, but this is a risk for both our large cap and SMid cap companies.
As for the potential impact on earnings, we do not expect the effect of a stronger
US dollar to be as widespread relative to the top line. We note that the hedging
practices of the large cap IT Hardware companies have mitigated currency-related
drags on earnings in the past. Even so, we highlight that Xerox (XRX, $9.73, N) and
IBM (IBM, $122.10, OW) appear to exhibit meaningful translation gains, which
stand to reverse course somewhat if the US dollar were to strengthen over time.
MOST EXPOSURE: Xerox (XRX, $9.73, N – TP $12.50)

As stated above, we would expect all large cap companies under our coverage to
exhibit moderating revenue growth trends (“as reported”) if recent strength in the
US dollar were to continue beyond the near term. As for any earnings impact, the
companies that could exhibit some impact as relates to translation gains easing
include Xerox and IBM.
LEAST EXPOSURE: Brocade (BRCD, $6.04, OW – TP $9.00)

SMid cap component companies denominate all sales in US dollars, and the currency
impact on earnings has been very nominal historically. Here we think Brocade could
fare the best against a strong US dollar, particularly given its strong US market share
position. Other examples include Emulex (ELX, $11.67, N), QLogic (QLGC,
$18.50, UW), Seagate Technology (STX, $17.75, N), and Western Digital (WDC,
$38.34, N).
48
Semiconductors
Robust Semi Revenue Growth in Europe Despite Currency Headwinds
Christopher Danely AC Although the semiconductor industry sells more than 85% of its products outside the
(1-212) 622-5615 United States, most of the sales are transacted using the US dollar. Sales into Europe
Chris.Danely@jpmorgan.com account for approximately 16% of semiconductor sales, where the majority of the
Venk Nathamuni sales are in local currencies. Approximately 50% of sales are into the Asia-Pacific
(1-415) 315-6783 region where transactions are typically completed in dollar-denominated currencies.
venkatesh.r.nathamuni@jpmorgan.com
J.P. Morgan Securities Inc. We expect negligible revenue impact due to a decline in the euro as many companies
in our coverage universe have reported signs of a snapback in growth in Europe
Company Name Ticker Rec during the past several quarters. Semiconductor demand conditions appear robust in
Advanced Micro Devices AMD N
Altera ALTR N Europe as multiple companies with high exposure to the euro including Microchip
Analog Devices ADI N (MCHP, $27.80, N) (26%), Altera (ALTR, $23.47, N) (24%), and Xilinx (XLNX,
Cypress Semiconductor CY UW
Intel INTC N $24.44, N) (24%) stated that Europe was their strongest region during the March
Linear Technology LLTC N quarter.
Maxim Integrated Products MXIM UW
Microchip Technology MCHP N
National Semiconductor NSM OW MOST EXPOSURE: ON Semiconductor (ONNN, $7.61, N)
ON Semiconductor Corporation ONNN N
RF Micro Devices RFMD N MOST EXPOSURE: Microchip (MCHP, $27.80, N – TP $26)
Texas Instruments TXN N
Xilinx XLNX N ON Semiconductor is one of the few companies that cited a small revenue impact
due to ASPs declining as the euro weakens. During the March quarter, 17% of its
sales were from Europe, but only about half of that was denominated in local
currencies. ON stated that because it maintains two manufacturing sites and several
design centers in Europe, the reduction in expenses offset the slight reduction in
revenue.
During the March quarter, Microchip had 26% of its sales from Europe, the highest
exposure in our universe. Despite prevailing FX issues, Microchip stated that Europe
was its fastest-growing region during the quarter, up 22% sequentially, the largest
percentage growth out of the region in many quarters. We do not expect the declining
euro to have a material impact on future revenues.
We do not expect a significant impact to companies in our semiconductor coverage
universe due to the decline in the euro. While the recent weakness in the euro has
affected sales of certain products such as notebook computers, we do not expect that
a reversal of the euro to the upside will have a significant impact on our
semiconductor universe.
49
Software
A Third of Software Spending from EMEA; Greatest FX Pain for Those Not Hedging
John DiFucci AC According to data from IDC, about one-third of Software revenue comes from
(1-212) 622-2341 EMEA on average, and financial disclosures from our coverage companies are
john.s.difucci@jpmorgan.com generally in line with this average. For the average software company, we project a
David Hafner year-over-year FX headwind to revenue of about 2% in 2010 based on current rates.
(1-212) 622-4071 Of course, in a strengthening dollar scenario, the headwind on the top line will be
david.l.hafner@jpmorgan.com offset to an extent from what would be cheaper (on USD basis) international
Giuseppe Incitti expenses. However, under this scenario the impact to operating income would
(1-212) 622-4350 typically be net negative as most companies generate a larger amount of international
giuseppe.x.incitti@jpmorgan.com
revenue than international expenses. For those companies that do not hedge (or have
J.P. Morgan Securities Inc. ineffective FX hedging programs), the net loss to operating income negatively
impacts the bottom line.
BMC Software, Inc. BMC UW
CA Inc. CA OW MOST EXPOSURE: Symantec (SYMC, $15.62, OW – TP $23); Oracle Corp
Citrix Systems, Inc. CTXS N
LogMeIn LOGM OW (ORCL, $23.41, OW – TP $30); SYBASE (SY, $39.54, OW – TP $50)
McAfee MFE OW
Microsoft MSFT N Though not all of their EMEA revenues are euro-based, we believe the bottom lines
Novell Inc NOVL RS of Oracle, Sybase, and Symantec are the most exposed in our coverage to a weak
Oracle Corp. ORCL OW
PROS Holdings PRO N euro as they each generate about one-third of revenue in EMEA and none hedge the
Quest Software QSFT OW FX impact to EPS. In each case, however, we believe these companies have
Red Hat Inc RHT N
SolarWinds SWI OW appropriately prepared investors for the probable FX impact, which is likely factored
SYBASE, Inc. SY OW into valuations at this time.
Symantec SYMC OW
Taleo TLEO OW
TIBCO Software Inc TIBX OW Symantec’s 31% EMEA-based revenue is about in line with the average for
VMware VMW N Software. However, Symantec doesn’t hedge its FX exposure. Based on “Rules of
Thumb” from Symantec, it takes about ten cents of US dollar strengthening versus
the euro to decrease EPS by a penny. Using these rules, FX would negatively impact
EPS by about $0.03 in fiscal 2011 relative to fiscal 2010. This assumes a EUR/USD
rate of $1.35 (in line with Symantec’s assumption) in fiscal 2011 versus a rate of
$1.42 in fiscal 2010. Of course, Symantec’s “Rules of Thumb” are just that, and
realized results can deviate from the expected impact. In addition, if the EUR/USD
rate averaged $1.27 (its current level) for the year, EPS would be negatively
impacted by $0.06 relative to fiscal 2010.
Oracle and Sybase both generated approximately 34% of their total TTM revenue
from the EMEA region with neither company hedging revenue or expenses.
Similarly, both companies generate more international revenue than they incur
international expenses and both incorporate the impact of FX in their guidance.
LEAST EXPOSURE:LogMeln (LOGM, $20.93, OW – TP $27); SolarWinds

(SWI, $18.19, OW – TP $27); Taleo (TLEO, $23.13, OW – TP $30)
Some of the smaller cap names in our coverage are the ones we believe are less
exposed on the bottom line to the weak euro due primarily to their lower-than-
average proportion of euro-based revenues. These include LogMeIn, SolarWinds,
and Taleo.
15% of Taleo’s revenue is generated internationally. Though a specific exposure to
the euro is not disclosed, it is less than 15% of revenue as a portion of Taleo’s
international revenue is generated in regions outside EMEA (e.g., APAC). In
addition, SolarWinds and LogMeIn both generate about 15-20% of revenue in
EMEA.
50
Software Technology
Wide Range of Impacts So Look Closely
Sterling Auty, CFA AC The bulk of our coverage is in companies where software is the driving force to the
(1-212) 622-6389 business, regardless if that software is delivered as a shrink-wrapped package,
sterling.auty@jpmorgan.com service, or appliance. For the most part companies in our coverage pay attention to
Lauren Ye the net exposure of currencies (revenue impact – expense impact) and they attempt to
(1-212) 622-6102 hedge that exposure. That is what companies like Amdocs (DOX, $29.81, OW),
lauren.c.ye@jpmorgan.com Check Point (CHKP, $31.93, N), and Websense (WBSN, $21.37, N) focus on, as
Saket Kalia, CFA well as hedging certain balance sheet accounts like A/R.
(1-212) 622-6477
saket.kalia@jpmorgan.com Some of our companies like Ansys (ANSS, $42.86, N) rely on natural hedges
(matching of revenue and expenses in a region) only, and then we have a couple that
are generating the overwhelming amount of revenue in the US so FX is a non-issue.
Company Name Ticker Rec Those companies include CSG, Neustar (NSR, $22.15, N), Blackbaud (BLKB,
Advent Software ADVS UW
Akamai Technologies, Inc. AKAM N
$21.47, N), Blackboard (BBBB, $39.27, N), and Syniverse (SVR, $18.90, OW).
Amdocs DOX OW
ANSYS, Inc. ANSS N MOST EXPOSURE: Autodesk (ADSK, $30.06, N – TP $30)
Ariba, Inc ARBA N
Autodesk ADSK N Autodesk is the leading supplier of design solutions for the Architecture,
Blackbaud Inc BLKB N
Blackboard BBBB N
Engineering, and construction industries. They are also one of the leaders for
Cadence Design Systems CDNS OW providing design solutions into the manufacturing segment.
Check Point Software CHKP N
Comverse Technology CMVT N With 41% of last quarter’s revenue from EMEA, Autodesk tops our companies in
CSG Systems CSGS N
Fortinet, Inc FTNT OW terms of exposure. Now technically Check Point had slightly more revenue in
Mentor Graphics MENT OW percentage terms from Europe at 42%, but they transact almost all of their business
Monotype Imaging TYPE OW
Neustar NSR N in US dollars so the actual impact is more indirect (do their products look cheaper or
Parametric Technology Corp. PMTC OW more expensive) than actual FX translation.
Rovi ROVI OW
SonicWALL SNWL OW
SS&C Technologies SSNC OW
Hedging program expanded after big hits in late 2008
Syniverse SVR OW Late in 2008 is when we started to see the big swings in FX impacting companies. As
Synopsys Inc SNPS N
VeriSign VRSN OW
a result, Autodesk took their hedging program that was focused on one quarter at a
Websense WBSN N time, and expanded it to a rolling-four-quarter program for both the euro and yen.
The amount that is hedged is reduced beyond the current quarter, and then increased
as the quarters roll off.
The actual impact on operating income the last eight quarters has ranged from 3% to
18% of reported income coming from FX impacts, but with most quarters seeing 15-
18% impacts. The table below outlines the impact on revenue, expenses, and
operating income for the last eight quarters.
Table 1: ADSK
(in millions) 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010
FX Impact on Total Net Revenue 41 42 18 -19 -31 -24 -4 22
FX Impact on Operating Expenses -14 -11 -3 17 22 14 2 -10
FX Impact on Operating Income (Loss) 27 31 15 -2 -9 -10 -2 12
Reported Operating Income 151.6 170.5 176.9 77.7 55.8 65.3 76.6 89
FX Impact as a % of operating income 18% 18% 8% -3% -16% -15% -3% 13%
Source: Company reports and J.P. Morgan estimates.
LEAST EXPOSURE: CSG Systems (CSGS, $21.34, N – TP $23.50)

For CSG, the swings in the euro and yen just do not matter at this point. The reason
is that the focus on providing billing and customer care solutions to the cable and
broadcast satellite market creates 100% of revenue out of North America. For CSG
to go internationally, we believe they will have to acquire internationally. We see this
company as a mid-single-digit top-line grower organically as we wait for emerging
businesses to gain traction, but one thing is evident – FX volatility is a non-issue.
51
52
53
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US Equity Research: Quantifying Euro Exposure

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For a complete list of contributors

Global FX Strategy (John Normand) ............................................................................5

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

Aerospace & Defense (Joseph B. Nadol III) ...............................................................11

Airfreight & Surface Transportation (Thomas R. Wadewitz) .......................................12

Electrical Equipment & Multi-Industry (C. Stephen Tusa, Jr.).....................................13

Engineering & Construction (Scott Levine).................................................................14

Environmental Services (Scott Levine).......................................................................15

Machinery (Ann Duignan)...........................................................................................16

Apparel/Textile Manufacturers (Christopher Kim).......................................................17

Autos & Auto Parts (Himanshu Patel) ........................................................................18

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

Broadlines & Food Retailing (Charles Grom) .............................................................20

Gaming & Lodging (Joseph Greff)..............................................................................21

Hardlines Retailing (Christopher Horvers) ..................................................................22

Homebuilding & Building Products (Michael Rehaut) .................................................23

Household Products & Personal Care (John Faucher)...............................................24

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

Tobacco (Rae Maile) ..................................................................................................26

Alternative Energy (Christopher Blansett) ..................................................................27

Electric Utilities & Independent Power Producers (Andrew Smith).............................28

Asset Managers (Kenneth B. Worthington) ................................................................29

Large Cap Banks (Vivek Juneja) ................................................................................30

US Exchanges (Kenneth B. Worthington) ..................................................................31

Life Science Tools & Diagnostics (Tycho W. Peterson) .............................................33

Medical Supplies & Devices (Michael Weinstein).......................................................34

Pharmaceuticals (Chris Schott) ..................................................................................35

Chemicals (Jeffrey J. Zekauskas) ..............................................................................37

Metals & Mining (Michael F. Gambardella).................................................................38

Paper & Packaging (Claudia Shank Hueston)............................................................39

Media & Telecommunications

Advertising & Marketing Services and Publishing (Alexia Quadrani)..........................41

Information Services & Broadcasting (Michael Meltz) ................................................42

Internet (Imran Khan) .................................................................................................43

Business Services (Andrew Steinerman) ...................................................................45

Communications Equipment & Data Networking (Rod Hall).......................................46

Computer Services & IT Consulting (Tien-tsin Huang) ...............................................47

IT Hardware (Mark Moskowitz)...................................................................................48

Semiconductors (Christopher Danely)........................................................................49

Software (John DiFucci) .............................................................................................50

Software Technology (Sterling Auty) ..........................................................................51

There is no doubting the shock-and-awe component to the announcement on

ECB Reinstates Liquidity Facilities/Fed Extends Swap Lines

The chief beneficiaries of Europe’s measures are high-yield and commodity

-14% -4% 6% 16%

Source: J.P. Morgan Dataquery.

Multi-National Cyclicals Would Underperform if EUR

Cyclicals vs. Defensives 6-mo chg

Source: J.P. Morgan and Bloomberg.

MARKET STRATEGY: Focus on Domestic Cyclicals, But

Looking at the Effect of a Weaker Euro across Industries

2 Tobacco Rae Maile PM (N) RAI (OW) 40% Avg

7 Machinery Ann Duignan AGCO (N) NAV (N) 29% Avg

9 Beverages John Faucher CCE (N) DPS (N) 0-55% Avg

10 US Pharmaceuticals Chris Schott PFE (OW) LLY (UW) 25% Avg

18 Semiconductors Christopher Danely ONNN (N) MCHP (N) 16% Low

25 Transportation Thomas Wadewitz UTIW (N) UNP (OW) 0-15% Low

30 Advertising and Publishing Alexia Quadrani GCI (N) — Low Low

Source: J.P. Morgan.

Aerospace & Defense

MOST EXPOSURE: United Technologies (UTX, $69.46, OW – TP $82)